##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2003

OR

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

For the transition period from _____________ to _____________

Commission File Number 0-23346

EQUITY MARKETING, INC.

(Exact name of registrant as specified in its charter)


|                                                                           |  |                                                
|-------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State of or other jurisdiction of
incorporation or organization) |  | 13-3534145
(I.R.S. employer identification No.)

6330 SAN VICENTE BLVD.
LOS ANGELES, CALIFORNIA 90048
(Address of principal executive offices)

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

Securities registered pursuant to Section 12 (b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each Class |  | Name of each exchange on which registered
|                    |  |                                          
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of class)

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 period 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  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes  o       No  x

As of June 30, 2003, the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was $49,185,910.

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

|                               |  |                  |           | 
|------------------------------ |  | ---------------- | --------- | 
|                               |  | Number of Shares
|                               |  | outstanding on  
|                               |  | March 26, 2004  
|                               |  |                 
|Common Stock, $0.001 par value |  |                  | 5,725,453 | 

Documents Incorporated by Reference: Certain portions of the Registrants
definitive Proxy Statement relating to registrants annual meeting of
stockholders to be held on May 20, 2004 are incorporated by reference into
Part III of this Form 10-K.



---

---





---

TABLE OF CONTENTS



|             |                                                                                              |                                            |  |  |  |  |  | 
|------------ | -------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I      
|             | ITEM 1. BUSINESS                                                                            
|             | ITEM 2. PROPERTIES                                                                          
|             | ITEM 3. LEGAL PROCEEDINGS                                                                   
|             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|PART II     
|             | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS               
|             | ITEM 6. SELECTED FINANCIAL DATA                                                             
|             | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|             | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                         
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                         
|             |                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|             | ITEM 9A. CONTROLS AND PROCEDURES                                                            
|PART III    
|             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                 
|             | ITEM 11. EXECUTIVE COMPENSATION                                                             
|             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                     
|             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                     
|             | ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES                                             
|PART IV     
|             | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                    
|SIGNATURES  
|EXHIBIT 10.8
|EXHIBIT 10.9
|EXHIBIT 21  
|EXHIBIT 23  
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



---



##### Table of Contents



EQUITY MARKETING, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2003

ITEMS IN FORM 10-K

|         |  |          |  |                                                                                      |  |     
|-------- |  | -------- |  | ------------------------------------------------------------------------------------ |  | ----
|         |  |          |  |                                                                                      |  | Page
|         |  |          |  |                                                                                      |  |     
|Part I   |  |          |  |                                                                                      |  |     
|         |  | Item 1.  |  | Business                                                                             |  | 2   
|         |  | Item 2.  |  | Properties                                                                           |  | 8   
|         |  | Item 3.  |  | Legal Proceedings                                                                    |  | 8   
|         |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                  |  | 9   
|Part II  |  |          |  |                                                                                      |  |     
|         |  | Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                |  | 9   
|         |  | Item 6.  |  | Selected Financial Data                                                              |  | 10  
|         |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and
Results of Operation |  | 11  
|         |  | Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                           |  | 27  
|         |  | Item 8.  |  | Financial Statements and Supplementary Data                                          |  | 28  
|         |  | Item 9.  |  | Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure |  | 56  
|         |  | Item 9A  |  | Controls and Procedures                                                              |  | 56  
|Part III |  |          |  |                                                                                      |  |     
|         |  | Item 10. |  | Directors and Executive Officers of the Registrant                                   |  | 57  
|         |  | Item 11. |  | Executive Compensation                                                               |  | 57  
|         |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                       |  | 57  
|         |  | Item 13. |  | Certain Relationships and Related Transactions                                       |  | 57  
|         |  | Item 14. |  | Principal Accounting Fees and Services                                               |  | 57  
|Part IV  |  |          |  |                                                                                      |  |     
|         |  | Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     |  | 58  

FORWARD-LOOKING STATEMENTS

Certain expectations and projections regarding the future performance of
Equity Marketing, Inc., a Delaware corporation (the Company), discussed
in this document 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. Readers should not place
undue reliance on any such forward-looking statements, which speak only as
of the date made. Actual results could vary materially from those
anticipated for a variety of reasons. The Company undertakes no obligation
to publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Readers
are advised to review Managements Discussion and Analysis of Financial
Condition and Results of Operation  Cautionary Statements and Risk
Factors.

1



---



##### Table of Contents






PART I




ITEM 1. BUSINESS

($000s omitted)

Except as expressly indicated or unless the context otherwise requires, as
used herein,EMAK, the Company, we, our, or us, means Equity
Marketing, Inc., a Delaware corporation and its subsidiaries. Unless
otherwise specifically indicated, all dollar amounts herein are expressed
in thousands.

Overview and Strategy

EMAK is a leading global integrated marketing services company. We focus
on the design and execution of strategy-based marketing programs providing
measurable results for our clients. We complement our core marketing
services business by developing and marketing distinctive consumer
products, based on emerging and evergreen licensed properties, which are
sold through mass-market and specialty retailers. EMAK is headquartered in
Los Angeles, with offices in Chicago, Minneapolis, New York, Ontario
(California), London, Paris and Hong Kong.

EMAK has expertise in the areas of: strategic planning and research,
entertainment marketing, design and manufacturing of custom promotional
products, promotion, event marketing, collaborative marketing, retail design and
environmental branding. Our clients include Burger King Corporation,
Diageo, Kelloggs, Kohls, Macys, Nordstrom, Procter & Gamble, and Subway
Restaurants, among others.

We believe our principal competitive advantages include:



| |  |  | our ability, as a full-service agency, to both design and implement strategy-based marketing programs;                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | extensive brand-building and sales-building experience developed over years of serving Burger King and other clients;                                       
|
| |  |  | extensive creative capabilities;                                                                                                                            
|
| |  |  | our access to a broad range of intellectual properties from the worlds of entertainment, music and sports; and                                              
|
| |  |  | an infrastructure that can deliver unique, high-quality and
cost-effective products and services in a very tight time frame,
with stringent quality control.

Our principal strategy is to be a market-driven and customer-driven global
organization that serves as a strategic marketing partner for its clients
through recommending, executing and measuring a broad range of fully
integrated brand-building and sales-building programs that may or may not
be promotional product-based.

Our Consumer Products business supports and complements our Marketing
Services business by leveraging our infrastructure, improving overall gross
margins, strengthening our relationships with licensors and retailers who
may also be promotions clients, and feeding our overall knowledge of trends
in popular culture.

Our Acquisition Strategy

We focus on diversifying and growing our Marketing Services skills and
client base with businesses that leverage our infrastructure, add new
clients and complementary service offerings, and/or offer new channels of
distribution or territories.



| |  |  | In July 2001, EMAK acquired Logistix Kids, gaining a presence in
Europe with broad-based strategic client relationships, including
research, new concept development, licensing guidance and the
development of premium-based promotions.                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In July 2002, EMAK acquired UPSHOT, gaining a marketing agency
with expertise in promotion, event, collaborative marketing, retail design, and environmental
branding, thereby providing us with the ability to provide a
broader range of services to existing clients and to develop a more
diverse client base.
|
| |  |  | In September 2003, EMAK acquired SCI Promotion Group,
establishing us as a leading provider of gift-with-purchase and
purchase-with-purchase promotional programs to the retail department
store industry.                                                                                                        
|
| |  |  | In February 2004, EMAK acquired Johnson Grossfield, expanding our
client base in the Quick Service Restaurant category with the
addition of the kids marketing program of Subway Restaurants.                                                                                                                     

We continue to seek new acquisition candidates that fit our strategy.

2



---



##### Table of Contents



Business Segments

Our business is classified into two reportable business segments, namely
Marketing Services and Consumer Products. These business segments have
been defined in a manner consistent with EMAKs organizational structure,
internal reporting, allocation of resources and operating decision-making.

Our Marketing Services revenues for the years ended December 31, 2001, 2002
and 2003 were $104,335, $168,659 and $183,687, or 72%, 82% and 84% of total
revenues, respectively. Our Consumer Products revenues for the years
ended December 31, 2001, 2002 and 2003 were $39,981, $38,173 and $35,426,
or 28%, 18% and 16% of total revenues, respectively.

A single client, Burger King, accounted for approximately 66%, 65% and 58%
of our total revenues for the years ended December 31, 2001, 2002 and 2003,
respectively.

The business segment revenues for 2001 and 2002 set forth above have been
reclassified to conform to our management structure effective January 1,
2003; specifically, the results of the USI division, which had been
previously reported as part of Marketing Services, are now being reported
as part of Consumer Products.

Marketing Services

Our largest Marketing Services offering is the design and implementation of
fully-integrated promotional marketing programs which incorporate products
used as free premiums or sold in conjunction with the purchase of other
products at retail. We also create non-premium based integrated marketing
programs that build brands and influence consumers behavior through
promotion, event, collaborative marketing and retail and environmental
design.

Premium-based promotions are used by both the companies sponsoring the
promotions, typically our clients, and the licensors of the entertainment,
music or sports properties on which the promotional products are based.
The use of promotional products based upon entertainment, music or sports
properties allows promotion sponsors to draw upon the popular identity
developed by the licensed characters through exposure in various media such
as television programs, motion pictures and publishing. Promotions are
designed to benefit sponsors by generating consumer loyalty, building
market share and enhancing the sponsors images as providers of value-added
products and services. In addition, motion picture and television studio
licensors often incorporate such promotions into their own marketing plans
because of the substantial advertising expenditures made by sponsors of
promotions and because the broad exposure of the licensed property to
consumers in the sponsors retail outlets supplements the marketing of
motion pictures and television programs by the studios.

Licenses for characters upon which our programs are based are generally
obtained directly by our clients (often with our assistance) from
licensors, including Warner Bros. Consumer Products, Universal Studios,
Nickelodeon, DreamWorks SKG, The Walt Disney Company, Sony Pictures
Entertainment and Twentieth Century Fox. Such licenses are typically
specific to the promotional campaign and generally do not extend beyond the
end of the promotional campaign.

We perform a wide range of creative, design, development, production and
fulfillment services for our clients, including:



| |  |  | assisting clients in understanding the consumer through creative research and planning;                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | assisting clients with promotional strategy, calendar planning, and concept development;                                                               
|
| |  |  | evaluating intellectual properties for which licenses are available;                                                                                   
|
| |  |  | advising clients as to which licenses are consistent with their marketing objectives;                                                                  
|
| |  |  | assisting clients in procuring licenses;                                                                                                               
|
| |  |  | proposing specific product and non-product based promotions utilizing the properties secured by our clients;                                           
|
| |  |  | developing promotional concepts and designs based on the property;                                                                                     
|
| |  |  | providing the development and engineering necessary to translate
the property, which often consists of two-dimensional artwork, into
finished products;
|
| |  |  | obtaining or coordinating licensor approval of product designs, prototypes and finished products;                                                      
|
| |  |  | contracting for and supervising the manufacture of products;                                                                                           
|
| |  |  | arranging for safety testing to customer and regulatory specifications by independent testing laboratories;                                            
|
| |  |  | arranging insurance, customs clearance and, in most instances, the shipping of finished products to the client;                                        

3



---



##### Table of Contents





| |  |  | providing warehousing, fulfillment and billing services; and                                                                                                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | providing creative services for packaging and point-of-sale advertising,                                                                                                    
|
| |  |  | developing collaborative marketing programs between retailers and manufacturers; and                                                                                        
|
| |  |  | creating three dimensional environments to influence consumers
purchasing behavior including environmental planning, store design,
space planning and visual merchandising.

In some instances, customers obtain license rights or develop promotions
concepts independently and engage us only to design and produce specific
products. More often, we provide the full range of our services.

EMAK pursues promotions opportunities worldwide. Our international
promotions often include unique products and programs tailored to local
markets as well as the use of products from promotions originally run in
the United States. American entertainment properties are generally
released in other countries subsequent to the date of their release in the
United States. Because we have already made the investment in the creative
development of concepts based upon such entertainment properties by the
time of their domestic release, we often have completed both creative, and
in some instances, production work, in advance of their foreign release.

Consumer Products

EMAKs Consumer Products division designs, manufactures and markets toys
and other consumer products for sale to major mass market retailers (such
as Toys R Us, Wal-Mart and Target), specialty market retailers and
various international distributors. Our products are primarily based upon
trademarks, characters and other intellectual properties we license from
major entertainment companies. In some cases, our products are based on
the same licensed properties used by our Marketing Services division.

The principal strategy of our Consumer Products business is to focus on
distinctive, niche products that complement our promotions business and use
the same design, production and logistics infrastructure. These products
are based on emerging and evergreen licensed properties that are likely to
produce revenue for several years, thus increasing the predictability of
our revenues. We currently intend to implement this strategy principally
through internal growth.

4



---



##### Table of Contents



The table below provides a summary of our current portfolio of emerging and
evergreen licensed properties, including the names of the licensed property
and the licensor, the dates on which the license was originally granted,
when the first products were or will be marketed under the license, the
expiration date of the current license term, the product categories covered
by the license and the geographic territories in which the licensed product
can be distributed.

|                                         |  |                                                             |  |            |  |                      |  |           |  |                                                         |  |                                   
|---------------------------------------- |  | ----------------------------------------------------------- |  | ---------- |  | -------------------- |  | --------- |  | ------------------------------------------------------- |  | ----------------------------------
|Property                                 |  | Licensor                                                    |  | Grant Date |  | Market Date          |  | Exp. Date |  | Categories                                              |  | Territory                         
|                                         |  |                                                             |  |            |  |                      |  |           |  |                                                         |  |                                   
|Scooby-Doo                              |  | Warner Bros.
Consumer Products                              |  | Jun 1998   |  | Sep 1998             |  | Dec 2007  |  | Toys based upon
television and
feature film
characters. |  | Worldwide (except
Asia and Mexico)
|                                        
|Robot Wars®                              |  | BBC Worldwide                                               |  | Jul 2000   |  | Sep 2000             |  | Dec 2006  |  | Pullback, radio
control and die
cast toys and
playsets. |  | United Kingdom and
Ireland        
|                                        
|Ace Lightning                            |  | BBC Worldwide                                               |  | Jan 2002   |  | Feb 2002             |  | Dec 2005  |  | Plastic toys and
playsets                               |  | United Kingdom and
Ireland        
|                                        
|Ultimate Book of Spells                  |  | BKN Consumer
Products                                       |  | Jan 2002   |  | Sep 2002             |  | Dec 2006  |  | Plastic figurines
and playsets                          |  | United Kingdom and
Ireland        
|                                        
|The Pink Panther                        |  | MGM                                                         |  | Jan 2002   |  | Feb 2003             |  | Dec 2004  |  | Plush items.                                            |  | United States and
Canada          
|                                        
|Crayola®                                 |  | Binney & Smith                                              |  | May 2002   |  | Aug 2002             |  | Dec 2005  |  | Bath toys,
activities and art
sets.                     |  | North America and
Europe          
|                                        
|Kim Possible                            |  | Disney Consumer
Products                                    |  | Sep 2002   |  | Aug 2003             |  | Dec 2005  |  | Toys and novelty
merchandise                            |  | United States and
Canada          
|                                        
|Jim Hensons Bear in
the Big Blue House |  | Disney Enterprises,
Inc. (formerly, The
Jim Henson Company) |  | Nov 2002   |  | Sep 2003             |  | Dec 2005  |  | Plush, figurines
and toy novelties.                     |  | North America and
Europe          
|                                        
|The Powerpuff Girls                     |  | Warner Bros.
Consumer Products                              |  | Feb 2003   |  | Aug 2003             |  | Dec 2005  |  | Figures, plush and
playsets                             |  | United States and
Canada          
|                                        
|Samurai Jack                            |  | Warner Bros.
Consumer Products                              |  | Feb 2003   |  | Aug 2003             |  | Dec 2005  |  | Figures, plush and
playsets                             |  | United States and
Canada          
|                                        
|Baby Einstein                           |  | The Baby Einstein
Company, LLC (a
Disney subsidiary)        |  | Feb 2003   |  | Jan 2004             |  | Dec 2005  |  | Puppets, plush,
activity and
infant/pre-school
toys.    |  | United States and
Canada          
|                                        
|JoJos Circus                           |  | Disney Consumer
Products                                    |  | Dec 2003   |  | Jan 2005
(Estimated) |  | Dec 2007  |  | Pre-school toys,
plush, playsets and
musical toys.      |  | United States                     

After we secure a new licensed property, we then develop, design and
engineer a product line and packaging. Much of this work is performed by
our internal staff of designers, artists, model makers and engineers. The
initial development of a product line under a new license typically takes
from four to 10 months. As a result, the addition of new licensed
properties requires substantial investment in design and development well
in advance of associated revenues. We expense such design and development
costs as incurred. In addition, we regularly refresh, redesign and extend
existing product lines.

We anticipate significant growth in our Consumer Products business in 2004,
as several of our licensed properties reach their first full-year of
distribution. In addition, the following factors are expected to favorably
impact our Consumer Products business in 2004 and beyond:



| |  |  | Our sales of Scooby-Doo merchandise were bolstered in 2002 by
the release of the Warner Bros. live-action feature film
Scooby-Doo. The sequel, Scooby-Doo 2: Monsters Unleashedwas
released March 26, 2004.                                                                                                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In 2003, we launched an expanded line of Crayola® brand bath
toys, bath activities and playsets, coinciding with the centennial
of the Crayola® crayon. Our 2004 plans for this line include the
addition of new channels of distribution, including drug and grocery
retailers.                                                                                                  
|
| |  |  | Our Kim Possible line was launched in Summer 2003 as a Wal-Mart
exclusive, with distribution expanded to other major retailers in
January 2004. Kim Possible, an original animated comedy-adventure
series, debuted in June 2002 on the
Disney Channel as the highest rated premiere ever for an original
Disney Channel series and now also airs Saturday mornings on ABC Kids.

5



---



##### Table of Contents





| |  |  | In January 2004 we began distributing the first toy products
based upon Baby Einstein, the best selling brand of videos
specifically created for babies and toddlers. We have granted
exclusive distribution to Target and Babies R Us for 2004.                                                                                                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In February 2004, Disney Enterprises, Inc. acquired the rights to
various properties owned by The Jim Henson Company, including Jim
Hensons Bear in the Big Blue House. We currently anticipate that
Disney will provide a higher level of entertainment and marketing
support for this property in the future, expanding opportunities for
distribution of our plush toy line.
|
| |  |  | In February 2004, we added another Disney property to our
portfolio, with a license to produce and market preschool toys,
plush, playsets and musical toys based on JoJos Circus, a cartoon
series that airs daily on Playhouse Disney.                                                                                                                                        

Backlog

Order backlog at March 19, 2003 and March 26, 2004 was approximately
$142,000 and $156,000, respectively. The Company expects the 2004 order
backlog to be filled by December 31, 2004.

Manufacturing

Our products are manufactured according to EMAK and customer specifications
by unaffiliated contract manufacturers, primarily in China. Our Hong Kong
staff manages the production of our products by our contract manufacturers
and performs or procures product sourcing, product engineering, quality
control inspections, independent safety testing and export/import
documentation. We believe that the presence of a dedicated staff in Hong
Kong results in lower net costs, increased ability to respond rapidly to
customer orders and maintenance of more effective quality control
standards. EMAK products are also manufactured by third parties in the
United States and Europe.

We generally retain, either for our self or on behalf of our clients,
ownership of the molds and tooling required for the manufacture of our
products. We are not a party to any long-term contractual arrangements
with any manufacturer.

During 2003, approximately 96% of our products were manufactured in China.
China currently enjoys permanent normal trade relations (NTR) status
under US tariff laws, which provides a favorable category of US import
duties. Chinas NTR status became permanent on January 1, 2002, following
enactment of a bill authorizing such status upon Chinas accession to the
World Trade Organization, which occurred in December 2001. This
substantially reduces the possibility of China losing its NTR status, which
would result in increased manufacturing costs for us and those of our
competitors sourcing products in China.

Virtually all of the raw materials used in our products are available from
numerous suppliers. Our contract manufacturers generally do not have
long-term supply contracts in place with their raw materials suppliers.
Accordingly, we are subject to variations in the prices we pay to
manufacturers for products, depending on what they pay for their raw
materials. An increase in the cost of raw materials, such as petroleum,
could result in price increases which EMAK may not be able to fully pass on
to customers. Any such increase could negatively impact our business,
financial condition or results of operations.

Trademarks and Copyrights

We do not typically own trademarks or copyrights on properties on which
most of our products are based. These rights are owned or controlled by
the creator of the property or by the entity which develops or promotes a
property, such as a motion picture or television producer.

Competition

Both our Marketing Services and Consumer Products businesses operate in
highly competitive domestic and international markets.

In our core domestic Marketing Services business, EMAK competes with
subsidiaries of The Interpublic Group of Companies (including Draft
Worldwide, The Zipatoni Company, Momentum and Marketing Drive Worldwide),
Frankel (a subsidiary of Publicis), 141 Worldwide (a subsidiary WPP),
Marketing Store Worldwide, Creata Promotion and Wunderman (a subsidiary of
WPP). Competition in the international promotions industry includes local
companies in each market and a small number of emerging international
promotions companies.

We believe the principal competitive factors affecting our Marketing
Services business are the development of client marketing and promotional
strategies, unique consumer insights, creative execution, license
selection, price, product and service quality and safety and speed of
production.

6



---



##### Table of Contents



Our Consumer Products competitors include companies which have far more
extensive sales and development staffs and significantly greater financial
resources than EMAK. Our principal competitors are mid-sized toy companies
like Playmates Holdings Limited, Play Along, Inc. and JAKKS Pacific, Inc.
However, the toy industry includes major toy and game manufacturers such as
Hasbro, Inc. and Mattel, Inc. that compete in some of the same product
categories as EMAK.

We believe the principal competitive factors affecting our Consumer
Products business are license selection, price, product quality and play
value.

Government Regulation

In the United States, our business is subject to the provisions of the
Consumer Product Safety Act and the Federal Hazardous Substances Act.
These acts empower the Consumer Product Safety Commission to protect the
public against unreasonable risks of injury associated with promotional and
consumer products, including toys and other articles. The Consumer Product
Safety Commission has the authority to exclude from the market articles
which are found to be hazardous and can require a manufacturer to repair or
repurchase such toys under certain circumstances. Any such determination
by the Consumer Product Safety Commission is subject to court review.
Violations of the Acts may also result in civil and criminal penalties.
Similar laws exist in some states and cities in the United States and in
many jurisdictions throughout the world.

We perform quality control procedures (including the inspection of goods at
factories and the retention of independent testing laboratories) to ensure
compliance with applicable product safety requirements, both domestically
and internationally. Notwithstanding the foregoing, there can be no
assurance that all of our products are or will be hazard-free. A product
recall could have a material adverse effect on our results of operations
and financial condition and could also negatively affect EMAKs reputation
and the sales of our other products.

Employees

As of December 31, 2003, EMAK employed a total of 356 individuals,
including 246 individuals located in the United States, 59 individuals
located in Europe and 51 individuals in Hong Kong. In addition, we utilize
freelance artists and other temporary staff on an ongoing basis in order to
serve our clients needs. We believe that our relations with our employees
are very good.

Executive Officers of the Registrant

The following persons are the executive officers of EMAK. Such executive
officers are appointed annually by our board of directors and serve at the
pleasure of the board. The table below provides information with respect
to our Executive Officers:

|                        |  |     |    |          |  |                                                     
|----------------------- |  | --- | -- | -------- |  | ----------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Donald A. Kurz          |  |     | 48 |          |  | Chairman of the Board and Chief Executive Officer   
|Kim H. Thomsen          |  |     | 51 |          |  | President and Chief Creative Officer                
|Bret R. Hadley          |  |     | 44 |          |  | President, Client Operations and Services           
|Gaetano A. Mastropasqua |  |     | 40 |          |  | President, Client Services                          
|Ian P. Madeley          |  |     | 48 |          |  | President, International                            
|Teresa L. Tormey        |  |     | 39 |          |  | Senior Vice President, General Counsel and Secretary
|Zohar Ziv               |  |     | 51 |          |  | Senior Vice President and Chief Financial Officer   

Donald A. Kurzbecame our Chairman and Chief Executive Officer in January
1999, after serving as President and Co-CEO from 1991 through 1998. He has
also served as a director since 1990, when he joined EMAK as Executive Vice
President. Mr. Kurz was previously a management consultant with the
general management consulting division of Towers Perrin, where he was a
vice president and senior partner and eventually headed the firms New York
office. Mr. Kurz earned a bachelors degree from Johns Hopkins University
and a masters in business administration from Columbia University Graduate
School of Business.

Kim H. Thomsenjoined EMAK in 1991 and is currently responsible for the
creative direction for all of our marketing services and consumer products.
She was promoted to her current post in early 2000. Prior to joining
EMAK, she operated her own business as a creative consultant. Ms. Thomsen
earned her bachelors degree from Cornell University.

Bret R. Hadleyjoined EMAK in July 2001 and is responsible for our consumer
products division as well as all product realization, including
manufacturing, quality control and distribution, as well as management
information systems. From November 1999 to May
2001, he was President and CEO of Frank Schaeffer Publications, Inc., an
educational products firm. From November 1997 to November 1999, he was
President of Wham-O, Inc., a toy and sporting goods manufacturer. From
December 1985 to November 1997, he served in various senior leadership
positions for Mattel, Inc., including most recently Senior Vice
President-International Marketing.

7



---



##### Table of Contents



He holds a bachelors degree from the
University of Minnesota and a masters in business administration from
UCLAs Anderson Graduate School of Management.

Gaetano A. Mastropasquajoined EMAK in 1997 as a Senior Director
responsible for our Burger King account. Mr. Mastropasqua currently
oversees our Burger King business. He was promoted to his current post in
July 2000, and has added oversight of our new business function to his
responsibilities. His prior experience includes approximately seven years
with American Express, where he ultimately became a vice president of
business development, and more than three years with Andersen Consulting in
Europe. He holds a bachelors degree from McGill University and a masters
in business administration from the Kellogg Graduate School of Management,
Northwestern University.

Ian P. Madeleyjoined EMAK in July 2001 and is responsible for the operations of
our Logistix Kids subsidiary, which the Company acquired on July 31, 2001. Mr.
Madeley had been the Managing Director of Logistix since 1989. In February
2003 he was named President, International with responsibility for implementing
EMAKs business strategies in Europe and other international markets. Mr. Madeley is also responsible for
expanding our Logistix Kids brand to the U.S. and oversees our newest
acquisition, Johnson Grossfeild. Prior to joining Logistix, he was the
Marketing Manager of SP Agency Stansfield Lake, and prior thereto was a
Marketing Manager of New Product Development for Express Foods Group, a leading
dairy product supplier. He holds a bachelors degree in economics from Hull
University.

Teresa L. Tormeyjoined EMAK in November 2002 as Senior Vice President,
General Counsel and Secretary. She is responsible for our legal and
business affairs, compliance and board administration functions. Ms.
Tormey was previously a partner in the corporate finance and transactions
practice group of Oppenheimer Wolff & Donnelly LLP. She holds a bachelors
degree in economics from UC Davis and a juris doctor from Pepperdine University School of Law.

Zohar Zivjoined EMAK in February 2004 as Senior Vice President and Chief
Financial Officer. He is currently responsible for the Companys finance,
treasury, accounting and corporate development functions. Prior to joining
EMAK, Mr. Ziv was the CFO of Stravina Operating Company, LLC, a supplier of
personalized novelty items, from June 2002 to February 2004; the CFO of
Joico Laboratories, Inc., a hair product supplier, from July 2001 to June
2002; the CFO of Intellisys Group, Inc., a multimedia system designer and
integrator, from June 1999 to February 2001; and the CFO of Inovision
Holdings, L.P., a medical supply manufacturer, from January 1988 to June
1999. His prior experience includes approximately twelve years with
Flowserve Corp., formerly BW/IP International, where he ultimately became a
treasurer and division controller, and more than four years with Getty Oil
Company. Mr. Ziv has a master of business administration in international
management from Thunderbird, The American Graduate School of International
Management, and a bachelor of science in accounting from California State
University, Northridge. He is a certified public accountant.

Available Information

Our website address is www.equity-marketing.com. EMAK makes available,
free of charge, on or through this website our periodic and current reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Act
of 1934 as soon as reasonably practicable after such material is filed with
or furnished to the SEC. Information contained on our website is not part
of this report.




ITEM 2. PROPERTIES

Our corporate headquarters consist of approximately 57,000 square feet of
leased space in Los Angeles, California under a lease which expires
December 31, 2009. SCI occupies approximately 41,000 square feet of office
and warehouse space in Ontario, California under a lease which expires
October 31, 2007. We also lease an approximately 40,000 square foot
warehouse in Indianapolis, Indiana under a lease which expires May 31,
2005. In Hong Kong, we occupy approximately 6,000 square feet of leased
space in Kowloon, under a lease which expires August 31, 2004.
Logistix occupies approximately 7,400 square feet and 1,900 square feet of leased space in
Gerrards Cross outside of London under leases that expire September 20,
2014 and September 19, 2011, respectively, and approximately 2,200 square feet of leased space in Paris under a
lease that expires January 31, 2013. UPSHOT occupies approximately 30,000
square feet of leased space in Chicago, Illinois under a lease that expires
March 31, 2009. In connection with a restructuring plan implemented in
2002, UPSHOT vacated approximately 30,000 square feet of leased space in
Chicago and approximately 12,000 square feet of leased space in Richmond,
Virginia. The Richmond, Virginia facility is currently occupied by a
subtenant and we are currently seeking a subtenant for the Chicago
facility.




ITEM 3. LEGAL PROCEEDINGS

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

8



---



##### Table of Contents






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

There were no matters submitted to a vote of security holders during the
fourth quarter of our fiscal year ended December 31, 2003.




PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our Common Stock is traded on The Nasdaq National Stock Market under the
symbol EMAK. On March 26, 2004 there were approximately 1,150 beneficial
holders of our Common Stock.

We currently have no plans to pay dividends on our Common Stock. We intend
to retain all earnings for use in our business. Under EMAKs current
credit facility, we cannot pay dividends on our Common Stock without the
prior consent of the lender. (See Note 6 of the accompanying Notes to
Consolidated Financial Statements.)

The high and low Common Stock prices per share were as follows:

|               |  |                             |       |      |  |      |       |     |  |  |       |  |  |  |       | 
|-------------- |  | --------------------------- | ----- | ---- |  | ---- | ----- | --- |  |  | ----- |  |  |  | ----- | 
|               |  | Price Range of Common Stock
|               |  |                            
|               |  | 2002                        |       | 2003
|               |  |                             |       |     
|               |  | High                        |       | Low  |  | High |       | Low
|               |  |                             |       |      |  |      |       |    
|First Quarter  |  |                             | 15.00 |      |  |      | 11.50 |     |  |  | 15.09 |  |  |  | 11.90 | 
|Second Quarter |  |                             | 14.55 |      |  |      | 11.69 |     |  |  | 15.50 |  |  |  | 13.01 | 
|Third Quarter  |  |                             | 13.99 |      |  |      | 10.70 |     |  |  | 16.29 |  |  |  | 14.00 | 
|Fourth Quarter |  |                             | 13.49 |      |  |      | 10.16 |     |  |  | 15.29 |  |  |  | 12.88 | 

9



---



##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below have been derived
from EMAKs audited consolidated financial statements and should be read in
conjunction with the related notes thereto and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.

|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |        |        | 
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | - | --------- | ------ | ------ | - | --------- | ------ | ------ | 
|Years Ended December 31,                                                                                 |                                                                              | 1999                                                                                              |           | 2000   |        | 2001 |           | 2002   |        | 2003
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |     
|Consolidated Statements of Operations and Per
Share Data:(in thousands, except share and per
share data)
|Revenues                                                                                                 |                                                                              | $                                                                                                 | 227,063   |        |        | $    | 232,287   |        |        | $    | 144,316   |        |        | $ | 206,832   |        |        | $ | 219,113   |       
|Cost of sales                                                                                            |                                                                              |                                                                                                   | 170,416   |        |        |      | 172,270   |        |        |      | 104,129   |        |        |   | 151,307   |        |        |   | 158,117   |       
|Forgiveness of note receivable                                                                           |                                                                              |                                                                                                   |          |        |        |      |          |        |        |      |          |        |        |   | 1,685     |        |        |   |          |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         | Gross profit                                                                 |                                                                                                   |           | 56,647 |        |      |           | 60,017 |        |      |           | 40,187 |        |   |           | 53,840 |        |   |           | 60,996 |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Operating expenses:                                                                                      |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                              | Salaries, wages and benefits                                                                      |           |        | 17,350 |      |           |        | 17,610 |      |           |        | 15,924 |   |           |        | 20,662 |   |           |        | 24,523 | 
|                                                                                                         |                                                                              | Selling, general and administrative                                                               |           |        | 22,829 |      |           |        | 23,075 |      |           |        | 18,323 |   |           |        | 22,423 |   |           |        | 24,576 | 
|                                                                                                         |                                                                              | AmeriServe bankruptcy bad debt expense                                                            |           |        | 1,014  |      |           |        | 482    |      |           |        |       |   |           |        |       |   |           |        |       | 
|                                                                                                         |                                                                              | Impairment of assets                                                                              |           |        |       |      |           |        | 8,504  |      |           |        |       |   |           |        |       |   |           |        |       | 
|                                                                                                         |                                                                              | Integration costs                                                                                 |           |        |       |      |           |        |       |      |           |        | 192    |   |           |        | 453    |   |           |        |       | 
|                                                                                                         |                                                                              | Restructuring loss (gain)                                                                         |           |        | (604   | )    |           |        | (418   | )    |           |        |       |   |           |        | 178    |   |           |        | 234    | 
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                              | Total operating expenses                                                                          |           |        | 40,589 |      |           |        | 49,253 |      |           |        | 34,439 |   |           |        | 43,716 |   |           |        | 49,333 | 
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                              | Income from operations                                                                            |           |        | 16,058 |      |           |        | 10,764 |      |           |        | 5,748  |   |           |        | 10,124 |   |           |        | 11,663 | 
|Other income (expense), net                                                                              |                                                                              |                                                                                                   | (510      | )      |        |      | 1,375     |        |        |      | 1,370     |        |        |   | 383       |        |        |   | 389       |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                              | Income before provision for
income taxes and cumulative effect
of change in accounting principles |           |        | 15,548 |      |           |        | 12,139 |      |           |        | 7,118  |   |           |        | 10,507 |   |           |        | 12,052 | 
|Provision for income taxes                                                                               |                                                                              |                                                                                                   | 6,134     |        |        |      | 6,797     |        |        |      | 2,517     |        |        |   | 3,786     |        |        |   | 4,103     |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                              | Income before cumulative effect
of change in accounting principles                                |           |        | 9,414  |      |           |        | 5,342  |      |           |        | 4,601  |   |           |        | 6,721  |   |           |        | 7,949  | 
|Cumulative effect of change in accounting
principles, net of tax                                         |                                                                              |                                                                                                   |          |        |        |      |          |        |        |      |          |        |        |   | (2,496    | )      |        |   |          |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                              | Net income                                                                                        |           |        | 9,414  |      |           |        | 5,342  |      |           |        | 4,601  |   |           |        | 4,225  |   |           |        | 7,949  | 
|Preferred stock dividends                                                                                |                                                                              |                                                                                                   |          |        |        |      | 956       |        |        |      | 1,500     |        |        |   | 1,500     |        |        |   | 1,500     |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Net income available to common
stockholders                                                              |                                                                              | $                                                                                                 | 9,414     |        |        | $    | 4,386     |        |        | $    | 3,101     |        |        | $ | 2,725     |        |        | $ | 6,449     |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Basic income per share:                                                                                  |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         | Income per share
before cumulative effect of
change in accounting principles |                                                                                                   | $         | 1.51   |        |      | $         | 0.70   |        |      | $         | 0.52   |        |   | $         | 0.91   |        |   | $         | 1.13   |       
|                                                                                                         | Cumulative effect of change in accounting
principles, net of tax             |                                                                                                   |           |       |        |      |           |       |        |      |           |       |        |   |           | (0.44  | )      |   |           |       |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         | Income per share                                                             |                                                                                                   | $         | 1.51   |        |      | $         | 0.70   |        |      | $         | 0.52   |        |   | $         | 0.48   |        |   | $         | 1.13   |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Basic weighted average shares
outstanding                                                                |                                                                              |                                                                                                   | 6,227,842 |        |        |      | 6,275,590 |        |        |      | 5,996,662 |        |        |   | 5,721,790 |        |        |   | 5,718,548 |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Diluted income per share:                                                                                |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         | Income per share
before cumulative effect of
change in accounting principles |                                                                                                   | $         | 1.46   |        |      | $         | 0.68   |        |      | $         | 0.50   |        |   | $         | 0.89   |        |   | $         | 1.03   |       
|                                                                                                         | Cumulative effect of change in accounting
principles, net of tax             |                                                                                                   |           |       |        |      |           |       |        |      |           |       |        |   |           | (0.33  | )      |   |           |       |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         | Income per share                                                             |                                                                                                   | $         | 1.46   |        |      | $         | 0.68   |        |      | $         | 0.50   |        |   | $         | 0.56   |        |   | $         | 1.03   |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Diluted weighted average shares
outstanding                                                              |                                                                              |                                                                                                   | 6,440,738 |        |        |      | 6,460,557 |        |        |      | 6,164,154 |        |        |   | 7,590,018 |        |        |   | 7,712,633 |       
|                                                                                                         |                                                                              |                                                                                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       

|                                               |  |      |        |      |  |      |         |      |  |      |        |  |  |   |         |  |  |   |         |  | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------- |  | 
|As of December 31,                             |  | 1999 |        | 2000 |  | 2001 |         | 2002 |  | 2003
|                                               |  |      |        |      |  |      |         |      |  |     
|Consolidated Balance Sheet Data:(in thousands)
|Working capital                                |  | $    | 11,045 |      |  | $    | 52,140  |      |  | $    | 36,620 |  |  | $ | 29,157  |  |  | $ | 29,447  | 
|Total assets                                   |  | $    | 97,244 |      |  | $    | 110,542 |      |  | $    | 99,487 |  |  | $ | 133,254 |  |  | $ | 128,330 | 
|Long-term debt                                 |  | $    |       |      |  | $    |        |      |  | $    |       |  |  | $ |        |  |  | $ |        | 
|Stockholders equity                           |  | $    | 42,025 |      |  | $    | 45,241  |      |  | $    | 42,473 |  |  | $ | 45,946  |  |  | $ | 53,666  | 

10



---



##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

2003 was a year of important achievement for EMAK:



| |  |  | In 2003 we entered into long-term agreements which provide that
we will retain our role as the primary creative and manufacturing
agency of record for Burger Kings worldwide premium programs. For
the first time in our 17 year relationship we have a significant
level of guaranteed premium manufacturing business under our
agreements with Burger King and Restaurant Services, Inc. (RSI).
RSI is a not-for-profit purchasing cooperative that has as its
members Burger King franchisees and Burger King and is the exclusive
purchasing agent for the Burger King system of franchisee-owned and
company-owned restaurants in the United States. Our agreements with
Burger King and RSI guarantee that we will retain our role as the
primary creative and manufacturing agency of record for both
domestic and international Burger King premiums programs awarded
through September 2004 (shipping through approximately September
2005). These evergreen agreements also provide for bi-annual
determinations of our guaranteed level of Burger King premiums
business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Logistix Kids subsidiary, which is based in the United
Kingdom, had another good year, growing its marketing services
business substantially over 2002. Since we acquired Logistix in
mid-2001, they have delivered annual growth in revenues beyond our
expectations. Were continuing to expand the presence of Logistix
Kids in both Europe and the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | Our Consumer Products business had a good year, with the
introduction of Disneys Kim Possible and an expanded line of
Crayola® retail bath products. 2003 was this divisions most
profitable year ever as gross margins improved from 30.3% in 2002 to
39.3% in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Our Consumer Products business is also poised for growth in 2004
as several of the licensed properties we acquired in 2003 reach
their first full year of distribution. These properties include
Disneys Kim Possible which enters wider channels of distribution
in 2004, Disneys Baby Einstein and Warner Bros.s Samurai Jack,
among others.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | We broadened our client base to a new channel of distribution
with the acquisition of the business SCI Promotion Group (SCI) in
September 2003. SCI has established itself as a premier marketing
services company to the retail department store industry, and counts
nine of the top ten department stores in the country as its
customers, including Kohls, Macys May Department Stores, Nordstrom
and Sears. SCI complements our existing capabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | We have the most diversified revenue mix since EMAKs initial
public offering in 1994. The contributions from our non-Burger
King-business increased from approximately $46,000 or 20% of revenues in 2000 to
approximately $94,000 or 43% of revenues in 2003. We expect to make further
progress on our diversification in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

We also faced challenges in 2003 that have negatively impacted our results:



| |  |  | We experienced lower unit volumes in our promotional programs for
Burger King. This negatively impacted our Marketing Services
revenues for the year. We expect this trend to continue in 2004
before reversing in 2005 as this well regarded brand begins its next
era of growth.                                                                                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We also experienced a significant decline in our Scooby-Doo
consumer products. In 2002, the successful feature film drove
higher levels of sales. We expect Scooby-Doo sales to recover in
2004 as the feature film sequel was released on March 26 and the
video is expected to be released later in the year.                                                                                                                
|
| |  |  | Our UPSHOT integrated marketing business, while profitable, did
not contribute the level of growth we expected. In 2003, we
incurred a restructuring charge in order to bring UPSHOTs cost
structure in-line with the current volume of business. We have put
in place plans to improve this business in 2004. We expect improved
contribution from UPSHOT based on a lower cost structure as well as
future growth in revenues.

At the end of 2003 our financial position remained strong with $19,291 in
cash and cash equivalents and no debt. We plan to continue to explore
additional acquisition candidates that fit our acquisition strategy. In
February 2004, we acquired the premiums business of Johnson Grossfield,
Inc. (JGI), thereby expanding our client base in the Quick Service
Restaurant category with the addition of the kids marketing programs of
Subway Restaurants. JGI has a twelve year relationship with Subway
Restaurants providing custom licensed premiums for its kids marketing
program. We are attracted to businesses like SCI and JGI that can leverage
our current infrastructure while contributing new clients, complementary
service offerings, and a strong presence in new channels of distribution or
geographies.

11



---



##### Table of Contents



Results of Operation

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

|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |      |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ---- | ----- | ---- | - | ---- | ----- | ---- | - |  | ----- | ---- | -
|Years Ended December 31,                                         |                                                                                                   | 2001 |       | 2002 |   | 2003
|                                                                 |                                                                                                   |      |       |      |   |     
|Revenues                                                         |                                                                                                   |      | 100.0 | %    |   |      | 100.0 | %    |   |  | 100.0 | %   
|Cost of sales                                                    |                                                                                                   |      | 72.2  | %    |   |      | 73.2  | %    |   |  | 72.2  | %   
|Forgiveness of note receivable                                   |                                                                                                   |      |      | %    |   |      | 0.8   | %    |   |  |      | %   
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|Gross profit                                                     |                                                                                                   |      | 27.8  | %    |   |      | 26.0  | %    |   |  | 27.8  | %   
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|Operating expenses:                                              |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|                                                                 | Salaries, wages and benefits                                                                      |      |       | 11.0 | % |      |       | 10.0 | % |  |       | 11.2 | %
|                                                                 | Selling, general and administrative                                                               |      |       | 12.7 | % |      |       | 10.8 | % |  |       | 11.2 | %
|                                                                 | Integration costs                                                                                 |      |       | 0.1  | % |      |       | 0.2  | % |  |       |     | %
|                                                                 | Restructuring loss                                                                                |      |       |     | % |      |       | 0.1  | % |  |       | 0.1  | %
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|                                                                 | Total operating expenses                                                                          |      |       | 23.8 | % |      |       | 21.1 | % |  |       | 22.5 | %
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|                                                                 | Income from operations                                                                            |      |       | 4.0  | % |      |       | 4.9  | % |  |       | 5.3  | %
|Other income, net                                                |                                                                                                   |      | 0.9   | %    |   |      | 0.2   | %    |   |  | 0.2   | %   
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|                                                                 | Income before provision for
income taxes and cumulative effect
of change in accounting principles |      |       | 4.9  | % |      |       | 5.1  | % |  |       | 5.5  | %
|Provision for income taxes                                       |                                                                                                   |      | 1.7   | %    |   |      | 1.9   | %    |   |  | 1.9   | %   
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|                                                                 | Income before cumulative effect of
change in accounting principles                                |      |       | 3.2  | % |      |       | 3.2  | % |  |       | 3.6  | %
|Cumulative effect of change in
accounting principles, net of tax |                                                                                                   |      |      | %    |   |      | (1.2  | )%   |   |  |      | %   
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     
|                                                                 | Net income                                                                                        |      |       | 3.2  | % |      |       | 2.0  | % |  |       | 3.6  | %
|                                                                 |                                                                                                   |      |       |      |   |      |       |      |   |  |       |     

Year ended December 31, 2003 compared to year ended December 31, 2002

Revenues

Our consolidated revenues in 2003 increased $12,281, or 5.9%, to $219,113
from $206,832 in 2002. Our Marketing Services revenues increased $15,028,
or 8.9%, to $183,687 from $168,659 primarily as a result of the inclusion
of revenues generated by UPSHOT and SCI as well as continued growth in our
non-Burger King marketing services business. The results for 2002 include
UPSHOT from July 18, 2002 (acquired July 17, 2002) and exclude SCI
(acquired September 3, 2003). Excluding the impact of the UPSHOT and SCI
acquisitions, Marketing Services revenues decreased $4,932 or 2.9% for 2003
compared to 2002. This decrease was due to challenges in our Burger King
business. Although we are still implementing a significant majority of the
worldwide programs for Burger King as we have previously, unit volumes in
those programs are lower than in previous years. These decreased unit
volumes are primarily related to overall business issues at Burger King
which is in a restructuring phase following its acquisition by Texas
Pacific Group in 2002.

The decreased volume levels in the Burger King business were partially
offset by continued growth at our Logistix Kids subsidiary. Our Logistix
Kids business based in the United Kingdom executed several successful
promotional programs for Kelloggs both domestically and internationally.
Logistix Kids also had another good year attracting new clients and has
branched out from their base in London into new markets in Western Europe.

Our Consumer Products revenues decreased $2,747, or 7.2%, to $35,426 from
$38,173 in 2002. This decrease is primarily as a result of decreased sales
of Scooby-Doo, Robot Wars® and Tub Tints® product partially offset by
sales from the launch of a product line based on Disneys Kim Possible and
increased sales of Crayola® product. Revenues for Scooby-Doo product in
2002 were higher primarily due to increased shipments attributable to the
Scooby-Doo feature film, which was released in the summer of 2002. Our
Robot Wars® product line in the United Kingdom experienced disappointing
sales in 2003 as a result of reduced consumer interest in the brand. In
2003, we successfully launched our new Kim Possible product line with an
exclusive at Wal-Mart. Both Wal-Mart and Disney provided significant
marketing and advertising support to the launch of the product line and we
were pleased with the results. In 2003, we expanded our line of Crayola®
bath products which already incorporated the effervescent water coloring
tablets previously marketed under the Tub Tints® brand to include a full
line of bath activities and bath art sets. As a result, sales of our
retail bath products increased significantly in 2003.

12



---



##### Table of Contents



Cost of sales and gross profit

Cost of sales increased $6,810 to $158,117 (72.2% of revenues) from
$152,992 (74.0% of revenues) in 2002 due to the higher sales volume in
2003. The gross profit percentage increased to 27.8% from 26.0% in 2002.
This increase is primarily the result of a charge for the forgiveness of a
note receivable of $1,685 (0.8% of revenues) in our Marketing Services
business in 2002.

Excluding the impact for the forgiveness of the note receivable, the gross
profit in our Marketing Services business decreased from 26.1% in 2002 to
25.6% in 2003 due to a decline in our Burger King margins as compared to
prior years. This decline is attributable to the provision of lower margin
logistical services, increased vendor costs and general pricing pressures.

The gross profit percentage in Consumer Products increased to 39.3% from
30.3% in 2002. This improvement is attributable to higher margin new
product introductions and to effective inventory management both internally
and in our distribution channels.

Our overall gross profit percentage, excluding the impact of the charge for
forgiveness of a note receivable in 2002, improved slightly as a result of
the improvement in Consumer Products.

Salaries, wages and benefits

Salaries, wages and benefits increased $3,861 in 2003, or 18.7%, to $24,523
(11.2% of revenues) from $20,662 in 2002 (10.0% of revenues). This
increase was primarily attributable to the addition of employees from the
acquisitions of UPSHOT and SCI, partially offset by a reduction in
performance bonuses for employees in 2003 (a decrease of approximately
$700).

Salaries, wages and benefits increased as a percentage of revenues from
10.0% to 11.2% as a result of revenues increasing at a lesser rate. The
reduction in Burger King unit volumes has a significant impact on this
metric, as our staffing levels required to service this account are largely
fixed.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $2,153 in 2003, or 9.6%,
to $24,576 (11.2% of revenues) from 22,423 (10.8% of revenues) in 2002. The
increase is primarily the result of additional operating expenses resulting
from the acquisitions of UPSHOT and SCI.

Selling, general and administrative expenses increased as a percentage of
revenues from 10.8% to 11.2% as a result of revenues increasing at a lesser
rate. The reduction in Burger King unit volumes has a significant impact
on this metric, as our cost structure required to service this account is
largely fixed.

Integration costs

We recorded integration costs of $453 (0.2% of revenues) in 2002. These
costs represent expenses directly related to the integration of UPSHOT such
as travel, training and consulting.

Restructuring

In 2003, we recorded a net restructuring charge of $234 (0.1% of revenues) compared
to $178 (0.1% of revenues) in 2002. In 2003, we recorded restructuring
charge of $424 which represents severance for workforce reductions at our
UPSHOT division. Our UPSHOT business did not achieve the level of
contribution we were expecting this year which is primarily attributable to
reduced marketing expenditures by a couple of its larger clients. In order
to bring our cost structure in line with the current business volume, we
eliminated 8 positions at UPSHOT. This charge was partially offset by a
$190 reversal of a restructuring reserve that we established in 1998
relating to former consumer products licenses. This reversal is
attributable to the expiration of certain contractual rights. The 2002
restructuring charge represents severance for workforce reductions made to
combine and streamline the operations of the Company subsequent to the
acquisition of UPSHOT.

Other income

Other income increased $6 in 2003, or 1.6%, to $389 (0.2% of revenues) from
$383 (0.2% of revenues) in 2002. Other income is composed of a gain on
foreign exchange of $439, a gain on asset disposal of $19 and net interest
expense of $69. Net interest income decreased $132 in 2003 from $63 in
2002. This decrease was attributable to a decline in interest rates as
well as to the reduced level of cash, cash equivalents and marketable
securities as a result of cash utilized for the acquisitions of UPSHOT and
SCI and the stock buyback program. The gain on foreign exchange is the
result of the strengthening British Pound and Euro relative to the United
States Dollar.

13



---



##### Table of Contents



Provision for Income Taxes

The effective tax rate changed in 2003 to 34.0% from 36.0% in 2002. The
decrease in the effective tax rate is primarily the result of revised
estimates of state income tax apportionment factors and an increase in the
relative mix of earnings being generated internationally in countries which
have more favorable tax rates.

Cumulative effect of change in accounting principles

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

Net income

Net income increased $3,724, or 88.1%, to $7,949 in 2003 (3.6% of revenues)
from $4,225 in 2002 (2.0% of revenues). The increase was primarily due to
the cumulative effect of change in accounting principles in 2002 of $2,496,
net of tax, a charge for the forgiveness of a note receivable in 2002 of
$1,045, net of tax, and the increase in gross profit earned on higher
revenues in 2003. The increase was partially offset by the increased
salaries, wages and benefits and selling, general and administrative
expenses in 2003.

Year ended December 31, 2002 compared to year ended December 31, 2001

Revenues

Our revenues in 2002 increased $62,516, or 43.3%, to $206,832 from $144,316
in 2001. Marketing Services revenues increased $64,324, or 61.7%, to
$168,659 from $104,335 primarily as a result of increased revenues
associated with Burger King programs in 2002 as compared to 2001. This
increase was also partially due to Marketing Services revenues generated by
Logistix following its acquisition by the Company in July 2001 and
Marketing Services revenues generated by UPSHOT following its acquisition
by the Company in July 2002. Excluding the impact of the UPSHOT and
Logistix acquisitions, Marketing Services revenues increased $38,143 or
36.6% for 2002 compared to 2001. Revenues in the Burger King business were
depressed in 2001 relative to previous years. Although our share of Burger
Kings custom promotional product business in 2001 was consistent with
previous levels, the dollar volume of Burger Kings purchases declined by
49% that year due to the Burger King systems working through of older
inventory and distribution issues related to the 2000 bankruptcy of its
largest distributor, AmeriServe. In 2002, Burger Kings purchases returned
to more normalized levels.

Our Consumer products revenues decreased $1,808, or 4.5%, to $38,173 from
$39,981 in 2001. This decrease is primarily due to decreased revenues for
made-to-order custom product sold to Oil and Gas customers and decreased
sales of Tub Tints® product. This was partially offset by increased sales
of Robot Wars® product generated by Logistix as well as to increased
revenues from Scooby-Doo product following the release of the Scooby-Doo
feature film in the summer of 2002. Excluding the impact of the Logistix
acquisition, Consumer Products revenues decreased $4,763, or 11.9% primarily
as a result of the decreased revenues for made-to-order custom product sold to Oil and Gas customers and decreased
sales of Tub Tints® product, partially offset by the increase in Scooby-Doo revenues.

The results for 2001 include Logistix from August 1, 2001 (acquired July
31, 2001) and exclude UPSHOT (acquired July 17, 2002). Excluding the
impact of acquisitions, consolidated revenues increased $33,005, or 24.7%,
compared to 2001.

In September 2002, the Pacific Maritime Association locked out the
Longshore and Warehouse Union workers from the West Coast ports causing a
cargo backlog. The impact of this West Coast port dispute caused a
reduction of our full year 2002 revenue expectations, due to delayed
shipments of both custom promotional products and consumer products, and
altered production schedules in our overseas facilities. Our estimate of
this impact is approximately $8.0 million of revenues. A portion of the
revenue impacted by the port dispute that we previously expected to
recognize in the fourth quarter of 2002 was deferred into 2003. The
remainder was cancelled.

14



---



##### Table of Contents



Cost of sales and gross profit

Cost of sales, including forgiveness of a note receivable, increased
$48,863 to $152,992 (74.0% of revenues) from $104,129 (72.2% of revenues)
in 2001 due primarily to higher revenues in 2002. The gross profit
percentage for the year decreased to 26.0% from 27.8% in 2001. Excluding
the charge for forgiveness of a note receivable the gross profit percentage
for 2002 was 26.8%.

Marketing Services gross profit decreased from 25.7% in 2001 to 25.1% in
2002. This decrease is primarily the result of the charge for the
forgiveness of a note receivable of $1,685 (0.8% of revenues) and margin
pressure as a result of shorter program lead times in the first half of
2002 which resulted in increased tooling and freight costs. This decrease
was partially offset by higher margin revenues from Logistix. On May 15,
2002, we agreed to forgive the remaining balance of $1,685 of a note
receivable from RSI as consideration for a new interim Master Supply
Agreement with RSI. Excluding the charge for forgiveness of a note
receivable the Marketing Services gross profit percentage for 2002 was
26.1%.

Consumer Products gross profit decreased from 33.3% in 2001 to 30.3% in
2002. This decrease was the result of an increased mix of lower margin
product.

Salaries, wages and benefits

Salaries, wages and benefits increased $4,738 in 2002, or 29.8%, to $20,662
(10.0% of revenues) from $15,924 in 2001 (11.0% of revenues). This increase
was primarily attributable to the addition of employees from the
acquisitions of Logistix and UPSHOT, as well as an accrual for employee
performance bonuses. Salaries, wages and benefits decreased as a
percentage of revenues from 11.0% to 10.0% as a result of revenues
increasing at a greater rate. The increase in Burger King revenues has a
significant impact on this metric, as our staffing levels required to
service this account are largely fixed.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $4,100 in 2002, or
22.4%, to $22,423 (10.8% of revenues) from $18,323 (12.7% of revenues) in
2001. The increase is primarily the result of higher selling expenses
associated with increased sales in 2002. This increase was also
attributable to additional operating expenses resulting from the
acquisitions of Logistix and UPSHOT, partially offset by the elimination of
goodwill amortization as a result of our adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets (see the discussion of cumulative effect of change in accounting
principles below). Selling, general and administrative expenses decreased
as a percentage of revenues from 12.7% to 10.8% as a result of revenues
increasing at a greater rate. The increase in Burger King revenues has a
significant impact on this metric, as our cost structure required to
service this account is largely fixed.

Integration costs

Integration costs increased $261, or 135.9%, to $453 (0.2% of revenues)
from $192 (0.1% of revenues) in 2001. These costs represent expenses
directly related to the integration of acquisitions such as travel,
training and consulting. The costs for 2002 are primarily associated with
the acquisition of UPSHOT, while the costs for 2001 are associated with the
acquisition of Logistix.

Restructuring

The Company recorded a restructuring charge of $178 (0.1% of revenues) in
2002. This restructuring charge represents severance for workforce
reductions made to combine and streamline the operations of the Company
subsequent to the acquisition of UPSHOT. As of December 31, 2002, $139 of
the restructuring costs has been paid.

Other income

Other income is composed of a gain on foreign exchange of $305, a gain on
asset disposal of $15 and net interest income of $63. Net interest income
decreased $1,383 in 2002 from $1,446 in 2001. This decrease was
attributable to a decline in interest rates as well as to the reduced level
of cash, cash equivalents and marketable securities as a result of cash
utilized for the acquisitions of Logistix and UPSHOT and the stock buyback
program. The gain on foreign exchange is the result of the strengthening
British Pound relative to the United States Dollar.

15



---



##### Table of Contents



Provision for Income Taxes

The effective tax rate changed in 2002 to 36.0% from 35.4% in 2001. The
increase was primarily due to lower tax free municipal interest income in
2002, partially offset by an increased percentage of the Companys earnings
being generated internationally, in territories which have more favorable
tax rates.

Cumulative effect of change in accounting principles

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

Net income

Net income decreased $376, or 8.2%, to $4,225 in 2002 (2.0% of revenues)
from $4,601 in 2001 (3.2% of revenues). The decrease was primarily due to
the cumulative effect of change in accounting principles of $2,496, net of
tax, a charge for forgiveness of note receivable of $1,045, net of tax,
increased salaries, wages and benefits and selling, general and
administrative expenses and decreased net other income, partially offset by
the increased gross profit earned on higher revenues in 2002.

Financial Condition and Liquidity

At December 31, 2003, cash, cash equivalents and marketable securities
decreased by $7,542 million to $19,291 at year end 2003 compared to $26,833
at year end 2002, primarily due to the acquisition of SCI and the
repurchase of common stock, partially offset by cash flows generated from
operating activities. Our financial position remained strong with no debt
and profitable operating results.

As of December 31, 2003, net accounts receivable decreased $7,052 to $36,765
from $43,817 in 2002. Accounts receivable as of December 31, 2002 were at
higher than normal levels as a result of shipment delays attributable to the
West Coast port dispute. This decrease was partially offset by additional
receivables acquired as a result of the SCI acquisition.

At December 31, 2003, inventories decreased $1,264 to $15,099 from $16,363 in
2002. This was primarily due to shipment delays at the end of 2002 attributable
to the West Coast port dispute which resulted in the timing of shipments being
shifted into the first quarter of 2003, thus resulting in higher than normal
inventory levels at the end of 2002. This decrease was partially offset by an
increase in Consumer Products inventories as a result of the addition of new
product lines which were introduced in 2003. Marketing Services inventories
represent 70% and 87% of total inventories as of December 31, 2003 and 2002,
respectively. Marketing Services inventories generally have lower risk than
Consumer Products inventories, as they usually represent product made to order.

At December 31, 2003, accounts payable decreased $9,469 to $28,865 from
$38,334 in 2002. This decrease is primarily attributable to decreased
shipments of product occurring later in the fourth quarter of 2002 as a
result of the West Coast port strike. This decrease was partially offset
by additional payables as a result of the SCI acquisition.

Due to customer decreased $5,811 to $5,276 from $11,087 in 2002. The
decrease in due to customer was primarily due to the timing of the payment
of royalty and administrative fees collected from distribution companies on
behalf of Burger King and RSI.

At December 31, 2003, accrued liabilities, including accrued payroll and
payroll related costs, decreased $1,323 to $11,919 from $13,242 in 2002.
The decrease in accrued liabilities was primarily attributable to a
decrease in the accrual for employee performance bonuses and accrued
freight costs. This was partially offset by additional accrued liabilities
as a result of the SCI acquisition and restructuring costs associated with
UPSHOT.

At December 31, 2003, working capital was $29,447 compared to $29,157 at
December 31, 2002. Cash flows provided by operations for 2003 were $1,961
compared to cash flows provided by operations of $10,581 in the prior year.
This change is largely the result of the reduction of current assets and
liabilities to more normalized levels due to the impact of the West Coast
port dispute on our receivables, payables and inventories. Cash flows used
in investing activities for 2003 increased $1,597 to $6,135 from $4,538 in
the prior year. This increase is primarily the result of proceeds received
in 2002 from sales of marketable securities which partially offset the
payment for the purchase of UPSHOT, compared to the use of cash in 2003 to
purchase SCI. Cash flows used in financing activities for 2003 were $2,517
compared to $2,393 in the prior year. This increase is the result of an
increase in the repurchase of our stock, partially offset by an increase in
the proceeds from the exercise of stock options.

16



---



##### Table of Contents



Our current strategy and business plan calls for the consummation of
additional mergers and acquisitions as well as the continued repurchase of
our common stock. We plan to continue to evaluate the level of such
expenditures in the context of the capital available to us and to changing
market conditions.

We believe that cash from operations, cash on hand at December 31, 2003 and
our credit facility will be sufficient to fund working capital needs for at
least the next twelve months. The statements set forth herein are
forward-looking and actual results may differ materially. See Credit
Facilities below and Note 6 of the accompanying Notes to Consolidated
Financial Statements.

Future minimum annual commitments for guaranteed minimum royalty payments
under license agreements, non-cancelable operating leases and employment
agreements as of
December 31, 2003 are as follows:

|                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|--------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                      |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |       | Thereafter |  | Total
|                      |  |      |       |      |  |      |       |      |  |      |       |            |  |      
|Operating Leases      |  | $    | 3,954 |      |  | $    | 3,942 |      |  | $    | 3,913 |            |  | $     | 3,882 |  |  | $ | 3,518 |  |  | $ | 5,791 |  |  | $ | 25,000 | 
|Guaranteed Royalties  |  |      | 1,070 |      |  |      | 2,020 |      |  |      | 220   |            |  |       | 330   |  |  |   |      |  |  |   |      |  |  |   | 3,640  | 
|Employment Agreements |  |      | 1,492 |      |  |      | 265   |      |  |      |      |            |  |       |      |  |  |   |      |  |  |   |      |  |  |   | 1,757  | 
|                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|Total                 |  | $    | 6,516 |      |  | $    | 6,227 |      |  | $    | 4,133 |            |  | $     | 4,212 |  |  | $ | 3,518 |  |  | $ | 5,791 |  |  | $ | 30,397 | 
|                      |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 

Subsequent to December 31, 2003, we signed a new lease agreement for the
Paris office. The new lease agreement expires December 31, 2013 and
provides for minimum annual payment of $96.

Subsequent to December 31, 2003, we renewed our license agreement for
Scooby-Doo with Warner Bros. The new license agreement expires December
31, 2007 and provides for guaranteed royalties in excess of $8,000 over the
term.

We had no material commitments for capital expenditures at December 31,
2003. Letters of credit outstanding as of December 31, 2002 and 2003
totaled $823 and $1,829, respectively.

Credit Facilities

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

We are currently negotiating with Bank of America to extend the term of the
Facility.

In addition to the Facility, in October, 2003 our Logistix subsidiary
established an import/letter of credit facility with Hong Kong Shanghai
Bank Corp. (HSBC) to provide short-term financing of product purchases
from Asia. The total availability under this facility is 1,000 GBP. Under
this facility HSBC may pay Logistixs vendors directly upon receipt of
invoices and shipping documentation. Logistix in turn is obligated to
repay HSBC within 120 days. Advances outstanding under this facility
totaled approximately $626 as of December 31, 2003 and are recorded in
accounts payable in the accompanying consolidated balance sheet.

Acquisitions

On July 17, 2002, we consummated the acquisition of UPSHOT, a marketing agency
with expertise in promotion, event marketing, collaborative marketing and
environmental branding. We financed the acquisition through our existing cash
reserves. The acquisition was consummated pursuant to an Asset Purchase
Agreement, dated May 22, 2002, by and among EMAK, Promotional Marketing, LLC
(Promotional Marketing) and HA-LO Industries, Inc. (HA-LO) (the Purchase
Agreement). Under the terms of the Purchase Agreement, we acquired the
principal assets of Promotional Marketing (consisting of the principal assets
used in connection with the operation of the UPSHOT business) for $9,206 in
cash plus related transaction costs of $685. This purchase price is net of $106
received in the fourth quarter of 2002 for a closing balance sheet working
capital adjustment. We assumed the principal current liabilities of the UPSHOT
business in connection with the acquisition. HA-LO, which is the parent
company of Promotional Marketing, was in Chapter 11 bankruptcy proceedings as
of the acquisition date, and our acquisition of the UPSHOT business was
approved by the United States bankruptcy court.

17



---



##### Table of Contents



On September 3, 2003, we acquired substantially all of the assets of SCI, a
privately held promotional marketing services company based in Ontario,
California. We financed the acquisition through our existing cash reserves. The
acquisition was consummated pursuant to an Asset Purchase Agreement dated
September 3, 2003, by and among EMAK, SCI and Joseph J. Schmidt, III (the
Purchase Agreement). Under the terms of the Purchase Agreement, we acquired
substantially all of the assets of SCI for a cash purchase price of
approximately $5,900 (before closing balance sheet working capital
adjustment), plus additional earnout consideration of up to $3,500 based
upon future performance of the acquired business. Net of a holdback of $250, we
paid $5,683 in cash plus related transaction costs of $538. We also assumed the
operating liabilities of the business in connection with the acquisition. The
earnout consideration is based upon the business achieving targeted levels of
earning before interest, taxes, depreciation and amortization (EBITDA) over
the period from 2003 through 2006. The earnout payments, if required, are
payable 50% in cash and 50% in shares of our common stock. The additional
consideration, if any, will be recorded as goodwill.

Issuance of Preferred Stock

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company (Crown), invested $11,900 in EMAK 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, (the Series A Stock) with a conversion price of $14.75
per share. In connection with such purchase, we 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, (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, (the Series C
Stock) at an exercise price of $1,000 per share. The Warrants were
immediately exercisable. The conversion prices of the Series B Stock and
the Series C Stock was $16.00 and $18.00 per share, respectively. On June
20, 2000, Crown paid us an additional $13,100 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, we granted to Crown additional
Warrants to purchase another 6,288 shares of Series B Stock and another
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, we 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 31, 2005. We paid
$250 in fees for the year ended December 31, 2003.

On March 19, 2004, we entered into a Warrant Exchange Agreement with Crown
whereby Crown received new warrants to purchase an aggregate of 916,666
shares of Common Stock (New Warrants) in exchange for cancellation of the
existing Warrants to purchase shares of Series B Stock and Series C Stock
(which, upon issuance, would be convertible into 916,666 shares of Common
Stock). The New Warrants consist of warrants to purchase 750,000 shares
and 166,666 shares of Common Stock at exercise prices of $16.00 and $18.00
per share, respectively. Of each tranch, 47.6% expire on March 29, 2010
and 52.4% expire on June 20, 2010. As a result of the exchange
transaction, Crown received an extension of time in which to exercise its
right to purchase additional equity in EMAK, and EMAK obtained an
elimination of the preferred rights and preferences as well as the
preferred dividend associated with the now eliminated Series B Stock and
Series C Stock.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the our affairs, Crown, as holder of the Series A Stock, will be entitled
to payment out of our assets 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 is subject to mandatory redemption at the option of the
holder at 101% of the aggregate Liquidation Preference plus accrued and
unpaid dividends if a change in control occurs.

Crown has voting rights equivalent to the number of shares of Common Stock
into which their Series A 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. Total
dividend for the year ended December 31, 2003 amounted to $1,500, of which
$375 was paid in January 2004 and recorded in accounts payable in the
accompanying consolidated balance sheet as of December 31, 2003.

Crown currently holds 100% of the outstanding shares of Series A Stock, and
has designated one individual to our Board of Directors. Crown currently
has the right to designate two additional directors.

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

18



---



##### Table of Contents



Restructuring

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

In connection with the restructuring plan, we also decided to close UPSHOTs
Richmond, Virginia office and eliminate certain positions at UPSHOTs Chicago,
Illinois office. Additionally, in 2003 we finalized the exit plan with respect
to vacating half of the leased space (approximately 30,000 square feet) at
UPSHOTs Chicago, Illinois office. This resulted in an adjustment to the
liabilities recorded and an increase to goodwill of $1,900 for the present
value of the remaining lease payments for the vacated office space in excess of
the estimated sub-lease income. The liabilities assumed in connection with
this restructuring plan totaled $3,535 and are included as part of goodwill in
accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination. $1,369 of these liabilities were paid as
of December 31, 2003.

In 2003, we recorded a restructuring charge of $424 which represents severance
for workforce reductions at our UPSHOT division. Our UPSHOT business did not
achieve the level of contribution we were expecting this year which is
primarily attributable to reduced marketing expenditures by a couple of its
larger clients. In order to bring our cost structure in line with the current
business volume, we eliminated eight positions at UPSHOT in December 2003. $58
of the restructuring charge was paid as of December 31, 2003. This charge was
partially offset by a $190 reversal of a restructuring reserve that we
established in 1998 relating to former consumer products licenses. This
reversal is attributable to the expiration of certain contractual rights.

Stock Repurchase

On July 21, 2000, our Board of Directors authorized up to $10,000 for the
repurchase of our common stock over a twelve month period. In the period
from July 21, 2000 to July 21, 2001, we spent $6,430 to purchase an
aggregate of 523,594 shares at an average price of $12.28 per share
including commissions. On July 24, 2001, our Board of Directors authorized
up to an additional $10,000 for the repurchase of our common stock over a
twelve month period. In the period from August 2, 2001 through July 11,
2002, we spent $5,605 to purchase 454,715 shares at an average price of
$12.33 per share including commissions. On July 12, 2002, our Board of
Directors authorized up to an additional $10,000 for the repurchase of our
common stock. We spent $3,294 to repurchase 251,100 shares at an average
price of $13.12 per share including commissions under this authorization
through December 31, 2003. The duration of the current buyback program is
indefinite; provided, however, that our Board of Directors intends to
review the program quarterly. Purchases are conducted in the open market
at prevailing prices, based on market conditions when we are not in a quiet
period. We may also transact purchases effected as block trades, as well
as certain negotiated, off-exchange purchases not in the open market.
Since initiating the overall buyback program on July 20, 2000, we have
spent $15,329 to purchase a total of 1,229,409 shares at an average price
of $12.47 per share including commissions through December 31, 2003. This
repurchase program is being funded through working capital.

Inflation

The effect of inflation on our operations during 2003 was insignificant. We
will continue our policy of controlling costs and adjusting prices to the
extent permitted by competitive factors.

Related Party Transactions

On July 15, 2003, we entered into an agreement with U.S. Capital Investors,
Inc. (USCI), an entity controlled by Jeffrey S. Deutschman, pursuant to which
USCI served as an advisor to the Company with respect to potential mergers and
acquisitions through December 31, 2003. Mr. Deutschman currently serves on our
Board of Directors as the representative of the holder of the Companys Series
A Preferred Stock. The agreement with USCI provides for the payment of a
discretionary success fee for completed acquisition transactions in an amount
determined by an independent committee of the Board in accordance with certain
guidelines and criteria. The guidelines for fees payable upon successful
completion of an acquisition transaction are $200 for up to $10,000 of
consideration, 1.5% of consideration from $10,000 to $25,000 and 1% of
consideration over $25,000; provided, however, that the success fee for the
first transaction under the agreement has an initial fee guideline of $275 for
up to $10,000 of consideration. Notwithstanding the guidelines, the independent
committee has absolute discretion in determining the amount, if any, of the
success fee for any transaction. The USCI agreement provides for the payment of
a refundable advance against success fees in the aggregate amount of $275. The
USCI agreement was approved by the Board and consented to by the holder of the
Series A Preferred Stock. We believe that this agreement has enhanced our
ability to analyze and close merger and acquisition transactions in a manner
that is more cost effective than traditional outside advisory firms. In
connection with the September 2003 acquisition of SCI, USCI earned a success
fee of $275. This success fee is recorded as a transaction cost of the SCI
acquisition. In connection with the February 2004 acquisition of JGI
(discussed below), USCI

19



---



##### Table of Contents



earned a success fee of $125. This
success fee will be recorded as a transaction cost of the JGI acquisition. We
are currently in discussions with USCI to continue the advisory related
services through 2004 which may or may not be on the same terms.

Subsequent Events

On February 2, 2004 (effective January 31, 2004), we consummated the
acquisition of the assets of the promotional agency business of Johnson
Grossfield, Inc., a Minnesota corporation (JGI). Founded in 1987, JGIs
promotional business is principally focused on providing custom licensed
premiums for the kids marketing program of Subway Restaurants. JGI provides
approximately 50% of the creative and sourcing requirements for Subways kids
premium programs, and handles 100% of Subways logistics and fulfillment needs
for these programs. JGI has worked with Subway for 12 years and has built
strong relationships with the franchise organization.

The acquisition was consummated pursuant to an Asset Purchase Agreement dated
January 16, 2004, by and among EMAK, Johnson Grossfield, Inc., a Delaware
corporation wholly owned by EMAK, JGI, Marc Grossfield and Thom Johnson (the
Purchase Agreement). Under the terms of the Purchase Agreement, we purchased
the assets of JGIs promotional agency business for approximately $4,600 in
cash and 35,785 shares of our common stock (which, based upon the January 30,
2004 closing price of $14.80, had a value of $530), plus additional earnout
consideration of up to $4,500 based upon future performance of the acquired
business. We also assumed the operating liabilities of the promotional agency
business in connection with the acquisition. The earnout consideration is based
upon the business achieving targeted levels of earnings before interest, taxes,
depreciation and amortization (EBITDA) over the period from 2004 through
2008. The earnout payments, if required, are payable 50% in cash and 50% in
shares of our common stock.

As discussed above under the heading Issuance of Preferred Stock, on March
19, 2004 we entered into an exchange transaction with Crown providing for the
exchange of existing Warrants to purchase Series B Stock and Series C Stock
expiring in 2005 for New Warrants to purchase Common Stock. In determining
that the warrant exchange transaction was fair, from a financial point of view,
our Board of Directors considered, among other things, a fairness opinion
issued by an independent financial advisory services firm.

Effective January 1, 2004, we entered into an employment agreement with Kim
Thomsen, our President and Chief Creative Officer. The employment agreement
provides for: (i) her continued service through December 31, 2007 (subject to
her option to become a part-time consultant during the last two years of the
term), (ii) a long-term deferred compensation arrangement in the form of a
pension annuity which vests over four years and provides for annual payments of
$200 to Ms. Thomsen commencing in 2008 and ending in 2017, and (iii) the current surrender by Ms.
Thomsen of 200,000 options at an exercise price of $9.94 per share which fully
vest on March 3, 2005 in exchange for 100,000 options at an exercise price of
19.94 per share which fully vest on March 3, 2005.

Recent Accounting Pronouncements

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

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair-value for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No.
148 is effective for fiscal years beginning after December 15, 2002. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
The adoption had no effect on our consolidated financial position or results of
operations. We continue to account for our stock-based compensation plans
under APB Opinion No. 25. See Note 1 in the accompanying Notes to Consolidated
Financial Statements.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, which addresses the consolidation of business enterprises (variable
interest entities) to which the usual condition (ownership of a majority voting
interest) of consolidation does not apply. The interpretation focuses on
financial interests that indicate control. It concludes that in the absence of
clear control through voting interests, a companys exposure (variable
interest) to the economic risks and potential rewards from the variable
interest entitys assets and activities are the best evidence of control.
Variable interests are rights and obligations that convey economic gains or
losses from changes in the values of the variable interest entitys assets and
liabilities. Variable interests may arise from financial instruments, service
contracts, nonvoting ownership interests and other arrangements. If an
enterprise holds a majority of the variable interests of an entity, it would be
considered the primary beneficiary. The primary beneficiary would be required
to include the assets, liabilities and the

20



---



##### Table of Contents



results of operations of the variable interest entity in its financial
statements. In December 2003, the FASB issued a revision to FIN 46 to address
certain implementation issues. The adoption of FIN 46 and FIN 46 (revised) did
not have an impact on our results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The guidance should be applied prospectively. The adoption of SFAS No.
149 did not have an impact on our results of operations or financial position.

In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity was issued, which requires that
certain financial instruments must now be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some
of its shares in exchange for cash or other assets and certain obligations that
can be settled with shares of stock. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and were
applied to our existing financial instruments effective July 1, 2003, the
beginning of the first fiscal period after June 15, 2003. The adoption of SFAS
No. 150 on July 1, 2003, did not have an impact on our consolidated financial
statements or disclosures. Our mandatory redeemable preferred stock does not
have a fixed and determinable redemption date and, therefore, is not impacted
by the adoption of SFAS No. 150.

In May 2003, the EITF issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. We were required to adopt the provisions of this Issue which had a
favorable impact of approximately $1,000, before taxes, on our results of
operations for the year ended December 31, 2003. Under the new contractual
arrangements with Burger King, creative services are a separate deliverable
from manufacturing services. As a result, we are required to record the
creative revenues when the specification and engineering package is delivered
to and accepted by Burger King.

Critical Accounting Policies

We make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses. The
accounting policies described below are those we consider most critical in
preparing our consolidated financial statements. Management has discussed the
development and selection of each of these critical accounting policies with
the audit committee of the board of directors and the audit committee has
reviewed each of the disclosures included below. These policies include
significant judgment made by management using information available at the time
the estimates are made. As described below, however, these estimates could
change materially if different information or assumptions were used.

Revenue Recognition

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

Service revenues include all amounts that are billable to clients under
service contracts. Service related revenues are recognized on a time and
materials basis, or on a straight-line basis, depending on the contract.
In the case of fee and production arrangements, the revenues are recognized
as the services are performed, which is generally ratably over the period
of the client contract. Revenues from time and materials service contracts
are recognized as the services are rendered. Revenues from fixed price
retainer contracts are recognized on a straight-line basis over the
contract term. Losses on contracts are recognized during the period in
which the loss first becomes probable and reasonably estimable.
Reimbursements, including those relating to travel and other out-of-pocket
expenses, and other similar third-party costs, such as printing costs, are
included in revenues, and an equivalent amount of reimbursable expenses are
included in cost of sales. Service revenues for the years ended December
31, 2001, 2002 and 2003 totaled $3,215, $13,895 and $22,129, respectively.
Unbilled revenues represent revenues recognized in advance of billings
rendered based on work performed to date on certain service contracts.
Unbilled revenues as of December 31, 2002 and 2003 totaled $230 and $992,
respectively. Unbilled revenues are recorded in accounts receivable in the
accompanying consolidated balance sheet. Unbilled revenues are expected to
be billed and collected within the next six months.

In May 2003, the EITF issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. The guidance in this Issue is effective for
revenue

21



---



##### Table of Contents



arrangements entered into in fiscal periods beginning after June 15,
2003. We were required to adopt the provisions of this Issue which had a
favorable
impact of approximately $1,000, before taxes, on our results of operations for
the year ended December 31, 2003. Under the new contractual arrangements with
Burger King, creative services are a separate deliverable from manufacturing
services. As a result, we are required to record the creative revenues when
the specification and engineering package is delivered to and accepted by
Burger King.

Our revenue recognition policies are in compliance with the Securities and
Exchange Commissions Staff Accounting Bulletins (SAB) No. 101: Revenue
Recognition in Financial Statements and SAB No. 104 Revenue Recognition
in Financial Statements.

The allowances for doubtful accounts receivable and sales returns represent
adjustments to customer trade accounts receivable for amounts deemed
partially or entirely uncollectible. Management believes the accounting
estimate related to such allowances is a critical accounting estimate
because significant changes in it could materially affect key financial
measures including revenues and selling, general and administrative
expenses. In addition, the allowances require a high degree of judgment
since they involve the estimation of the impact of both current and future
economic factors as it relates to each of its customers ability to pay
amounts owed to us. In the case of its Consumer Products segment, we must
estimate the impact of retail sell through on customer discounts and
returns.

We regularly extend credit to distribution companies in connection with our
business with Burger King, which more recently includes the newly formed
Supply Chain Services, LLC (SCS), which is a subsidiary of Burger Kings
franchisee purchasing cooperative RSI. We began selling product to SCS in
October, 2003. We anticipate that sales to SCS will reach 70% of our sales
to the Burger King System by the end of 2004. Receivables from
SCS are being guaranteed by RSI as required under our credit policy. Because of RSIs established credit
history with us, we dont believe that this increase in concentration of
receivables has negatively impacted our overall credit risk. Failure by
SCS or one or more distribution companies to honor their payment
obligations to us could have a material adverse effect on our operations.
The largest such distribution company accounted for 20.8%, 20.5% and 17.9% of the
products purchased from us by the Burger King system for the years ended
December 31, 2001, 2002 and 2003, respectively. The largest such distribution
company accounted for 13.6% and 23.9% of accounts receivable as of December
31, 2002 and 2003, respectively.

We also extend credit to several retailers in the Consumer Products
business. The mass market retail channel has experienced significant
shifts in market share among competitors in recent years, causing some
large retailers to experience liquidity problems. Failure by one or more
of these retailers to honor their payment obligations to us could have a
material adverse effect on our operations.

We have procedures to mitigate the risk of exposure to losses from bad
debts. Revenue is recognized provided that: there are no uncertainties
regarding customer acceptance; persuasive evidence of an agreement exists
documenting the specific terms of the transaction; the sales price is fixed
or determinable; and collectibility is reasonably assured. Our credit
limits and payment terms are established based on the underlying criteria
that collectibility must be reasonably assured at the levels set for each
customer. Extensive evaluations are performed on an on-going basis
throughout the fiscal year of the financial performance, cash generation,
financing availability and liquidity status of each customer. Each
customer is reviewed at least annually, with more frequent reviews being
performed if necessary based on the customers financial condition and the
level of credit being extended. For customers who are experiencing
financial difficulties, management performs additional financial analyses
prior to shipping to those customers on credit. Customer terms and credit
limits are reviewed and adjusted, if necessary, to reflect the results of
the review. We use a variety of financial transactions to ensure
collectibility of accounts receivable of customers deemed to be a credit
risk, including requiring letters of credit and requiring cash on delivery.

We record allowances for doubtful accounts receivable and sales returns at
the time revenue is recognized based on managements assessment of the
business environment, customers financial condition, historical collection
experience, accounts receivable aging, retail sell through and customer
disputes. When a significant event occurs, such as a bankruptcy filing of
a customer, the allowance is reviewed for adequacy and adjusted to reflect
the change in estimated receivable impairment. We believe that our
allowances for doubtful accounts receivable and sales returns at December
31,2003 are adequate and proper.

Goodwill and Other Intangibles

SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets were approved by FASB effective June 30, 2001 for
business combinations consummated after June 30, 2001. SFAS No. 141
eliminates the pooling-of-interests method for business combinations and
requires use of the purchase method. SFAS No. 142 changes the accounting
for goodwill and certain other intangible assets from an amortization
approach to a non-amortization (impairment) approach. The statement
requires amortization of goodwill recorded in connection with previous
business combinations to cease upon adoption of the statement by calendar
year companies on January 1, 2002. The statement required us to perform a
transitional goodwill impairment test, using values as of the beginning of
the fiscal year that SFAS No. 142 is adopted. We completed the goodwill
transitional impairment test in the second quarter of 2002. As a result,
we determined that a non-cash charge in the amount of $2,496, net of tax,
is required in connection with the goodwill resulting from the 1998
acquisition of Contract Marketing, Inc. and

22



---



##### Table of Contents



U.S. Import and Promotions Co.,
collectively referred to as USI. The transition charge is reflected as a
cumulative effect of change in accounting principles effective January 1,
2002, and therefore, results for the quarter ended March 31, 2002 have been
adjusted retroactively. We have adopted the provisions of these statements
for the acquisition of Logistix effective July 1, 2001 and for all other
acquisitions effective January 1, 2002. Accordingly, beginning on January
1, 2002, we have foregone all related goodwill amortization expense.

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

Under the provisions of SFAS No. 142, the carrying value of assets
acquired, including goodwill, are reviewed annually. During such a review
we will estimate the fair value of the reporting unit to which the assets
were assigned by discounting the reporting units estimated future cash
flows before interest. We will compare the discounted future cash flows
to the carrying value of the acquired net assets to determine if an
impairment loss has occurred. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds their estimated fair values.
In the fourth quarter of 2003, we performed the annual impairment test
required by SFAS No. 142 and determined that our goodwill was not impaired
as of December 31, 2003.

Management believes the accounting estimate related to the valuation of its
goodwill and other intangibles is a critical accounting estimate because
significant changes in assumptions could materially affect key financial
measures, including net income and goodwill.

Our valuation method requires us to make projections of revenue, operating
expenses and working capital investment for the reporting unit over a
multi-year period. Additionally, management must make an estimate of its
weighted average cost of capital to be used as a discount rate. Changes in
these projections or estimates could result in a reporting unit either
passing or failing the first step in the SFAS No. 142 impairment model,
which could significantly change the amount of impairment recorded.

Royalties

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

Management believes the accounting estimate related to minimum guaranteed
royalty commitments is a critical accounting estimate because changes in
sales projections could materially affect key financial measures including,
gross profit, net income and other assets.

Inventories

Inventories are stated at the lower of cost or market. Inventory obsolescence
reserves are recorded for damaged, obsolete, excess and slow-moving inventory.
Management believes the accounting estimate related to inventory allowance is a
critical accounting estimate because changes in it could materially affect
key financial measures including, gross profit, net income and inventories. In
addition, the valuation requires a high degree of judgment since it involves
estimation of the impact resulting from both current and expected future
events. As more fully described below, valuation of our Consumer Product
inventory could be impacted by changes in public and consumer preferences,
demand for product, or changes in the buying patterns and inventory management
of customers.

Although the significant majority of our inventories are composed of
made-to-order promotional product, in the Consumer Product segment orders are
subject to cancellation or change at any time prior to shipment since actual
shipments of products ordered and order cancellation rates are affected by
consumer acceptance of product lines, strength of competing products, marketing
strategies of retailers and overall economic conditions. Unexpected changes in
these factors could result in excess inventory in a particular product line,
which would require management to make a valuation estimate on such inventory.

We base our production schedules for consumer products on customer orders,
historical trends, results of market research and current market information.
We ship products in accordance with delivery schedules specified by our
customers, which usually request delivery within three months. In anticipation
of retail sales in the traditional holiday season in the fourth quarter, we
significantly increased our production in advance of the peak selling period,
resulting in a corresponding build-up of consumer product inventory levels in
the second and third quarters of the year. These seasonal purchasing patterns
and requisite production lead times cause risk to our consumer

23



---



##### Table of Contents



product business
associated with the underproduction of popular products and the overproduction
of products that do not have significant consumer demand. Retailers are also
attempting to manage their inventories more tightly, requiring us to ship
products closer to the time the retailers expect to sell the products to
consumers. These factors increase inventory valuation risk since we may not be
able to meet
demand for certain products at peak demand times, or that our own inventory
levels may be adversely impacted by the need to pre-build products before
orders are placed.

Additionally, current conditions in the domestic and global economies are
extremely uncertain. As a result, it is difficult to estimate the level of
growth in various parts of the economy, including the markets in which we
participate. Economic changes may affect the sales of our consumer products
and its corresponding inventory levels, which would potentially impact the
valuation of our inventory.

At the end of each quarter, management within the Consumer Products business
segment performs a detailed review of its inventory on an item by item basis
and identifies which products are believed to be obsolete or slow-moving.
Management then applies an allowance for inventory obsolescence to such
inventory based on certain expectations, including customer and consumer demand
for product and the aging of the inventory, which are impacted by the factors
discussed above.

Management believes that the allowance for obsolescence at December 31, 2003 is
adequate and proper. However, the impact resulting from the aforementioned
factors could cause actual results to vary. Any incremental obsolescence
charges would negatively affect the results of operations of the Consumer
Products business segments.

Cautionary Statements and Risk Factors

Set forth below and elsewhere in this Form 10-K and in other documents we
file with the Securities and Exchange Commission are important risks and
uncertainties that could cause our actual results of operations, business
and financial condition to differ materially from the results contemplated
by the forward looking statements contained in this Form 10-K.

We Depend Significantly on One Key Customer

Our success is partly dependent on a single customer, Burger King, which
accounted for approximately 66%, 65% and 58% of our revenues for the years
ended December 31, 2001, 2002 and 2003, respectively. The termination or a
significant reduction by Burger King of its business with us would
adversely affect our business. We have domestic and international
agreements with Burger King and its franchisee purchasing cooperative which
guarantee that we will retain our role as the primary creative and
manufacturing agency of record for both domestic and international Burger
King premiums programs awarded through September 2004 (shipping through
approximately September 2005). Our long-term agreements provide for
bi-annual determinations of our guaranteed level of Burger King premiums
business. The Burger King business is subject to significant year-to-year
variability. For instance, our revenues generated by our business with
Burger King increased from $95,405 in 2001 to $133,987 in 2002 then dropped
to $126,791 in 2003. We expect a further reduction in sales to Burger King
of $15,000 to $20,000 in 2004 before increasing in 2005. The success of
our business with Burger King is also partially dependent on the overall
success of the Burger King system, whose sales could be negatively impacted
by such factors as increased competition, a recent change in ownership and
product recalls.

We Face Credit Risk

We regularly extend credit to distribution companies in connection with our
business with Burger King, which more recently includes the newly formed
SCS, which is a subsidiary of Burger Kings franchisee purchasing
cooperative RSI. We began selling product to SCS in October, 2003. We
anticipate that sales to SCS will reach 70% of our sales to the Burger King
System by the end of 2004. Failure by SCS to honor their payment
obligations to us could have a material adverse effect on our operations.
Receivables from SCS are being guaranteed by RSI as required under our credit policy. Because of
RSIs established credit history with us, we dont believe that this
increase in concentration of receivables has negatively impacted our
overall credit risk. However, there can be no assurance that we will be
able to continue to obtain guarantees from RSI in the future. We also
extend credit to several retailers in connection with our Consumer Products
business. The mass market retail channel has experienced significant
shifts in market share among competitors in recent years, causing some
large retailers to experience liquidity problems. Failure by one or more
of these retailers to honor their payment obligations to us could have a
material adverse effect on our business.

We Rely on the Continued Development of New Promotional Programs

A large portion of our revenues come from a relatively limited number of
promotional programs, which promotions are in effect for only a limited
period of time and generally are not repeated. We must continually develop
and sell new products and services for utilization in new promotional
programs as part of our clients annual promotions calendars. There can be
no assurance that we or our customers will be able to secure licenses for
additional entertainment properties on which to base our promotional
products or that, if secured, such licenses will result in successful
products.

24



---



##### Table of Contents



We Rely on the Continued Development of New Consumer Products

Many consumer products are successfully marketed for only one or two years
as a result of changing consumer preferences. Accordingly, our Consumer
Products business depends on the ability to develop and market new products
associated with new
entertainment properties or proprietary concepts. There can be no
assurance that any new retail product line will be successful. The
cancellation or premature termination of one or more retail product lines
because of our inability to renew or extend licenses (which typically have
terms of three years or less) on favorable terms or otherwise, could have a
material adverse effect on us. In addition, there can be no assurance that
we will be able to secure licenses for additional entertainment properties
on which to base our consumer products or that, if secured, such licenses
will result in successful products.

The Success of Our Products Depends on the Popularity of Licensed Materials

Our promotional premiums and consumer products are typically based on
entertainment properties, such as characters from current motion pictures
or television programs. The success of these products largely depends on
the popularity of the entertainment properties on which they are based.
Each motion picture and television program is an individual artistic work,
and its commercial success is dependent on unpredictable consumer
preferences. Our results of operations may be adversely affected if the
entertainment properties upon which our products are based turn out to be
less popular than we anticipate. Also, delays in the release of motion
pictures or television programs could result in delays or cancellations of
our promotions.

Our Future Operating Results are Difficult to Predict

We experience significant quarter-to-quarter variability in our revenues
and net income. The promotions business tends to include larger promotions
in the summer and during the winter holiday season. Major movie and
television release schedules also vary year-to-year, influencing the
promotional schedules of our customers, as well as the particular
promotions for which we are retained. The motion picture or television
characters on which the promotions business is often based may only be
popular for short periods of time or not at all. There may not be
comparable popular characters or similar promotional campaigns in the
future. Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our
future performance. It is likely that in some future quarter our operating
results may fall below the expectations of securities analysts and
investors.

There Are Risks Associated with Acquisitions

If we are presented with appropriate opportunities, we intend to make
investments in complementary companies. We may not realize the anticipated
benefits of any acquisitions or investment. If we buy a company, we could
have difficulty in assimilating that companys personnel and operations.
In addition, the key personnel of the acquired company may decide not to
work for us. If we make other types of acquisitions, we could have
difficulty in assimilating the acquired technology or products into our
operations. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and/or
amortization expenses related to goodwill and other intangible assets,
which could adversely affect our results of operations and financial
condition.

25



---



##### Table of Contents



Our Business May be Impacted by Adverse General Economic Conditions

Current conditions in the domestic and global economies are extremely
uncertain. As a result, it is difficult to estimate the level of growth for the
economy as a whole. It is even more difficult to estimate growth in various
parts of the economy, including the markets in which we participate. Because
all components of our budgeting and forecasting are dependent upon estimates of
growth in the markets we serve and demand for our products and services, the
prevailing economic uncertainties render estimates of future income and
expenditures even more difficult than usual to make. Adverse changes may occur
as a result of softening global economies, wavering consumer confidence caused
by the threat or occurrence of terrorist attacks such as those in the US on
September 11, 2001, war, or other factors affecting economic conditions
generally. Such changes may negatively affect the sales of our products,
increase exposure to losses for bad debt, or increase costs associated with
manufacturing and distributing these products.

Our Current Licenses Require Us to Pay Minimum Royalties

Sales of products under trademarks or trade or brand names licensed from
others account for substantially all of our Consumer Products revenues.
Product licenses allow us to capitalize on characters, designs, concepts
and inventions owned by others or developed by toy inventors and designers.
Our license agreements generally require us to make specified minimum
royalty payments, even if we fail to sell a sufficient number of units to
cover these amounts.

Our Business is Subject to Extensive Government Regulation and to Potential
Product Liability Claims

Our business is subject to the provisions of, among other laws, the Federal
Consumer Products Safety Act and the Federal Hazardous Substances Act, and
rules and regulations promulgated under these acts. These statutes are
administered by the Consumer Product Safety Commission (CPSC) which has
the authority to remove from the market products that are found to be
defective and present a substantial hazard or risk of serious injury or
death. The CPSC can require a manufacturer to recall, repair, or replace
these products under certain circumstances. We cannot assure that defects
in our products will not be alleged or found. Products that we develop or
sell may expose us to liability from claims by users of such products for
damages including, but not limited to, bodily injury or property damage.
We currently maintain product liability insurance coverage in amounts that
we believe are adequate. There can be no assurance that we will be able to
maintain such coverage or obtain additional coverage on acceptable terms in
the future, or that such insurance will provide adequate coverage against
all potential claims. Products that we develop or sell may also expose us
to liability for the costs related to product recalls. These costs can
include legal expenses, advertising, collection and destruction of product,
and free goods. Our product liability insurance coverage generally
excludes such costs and damages resulting from product recall.

Our Markets Are Highly Competitive

The markets in which our businesses operate are highly competitive. Our
competitors, and in many cases their parent companies, include companies
which have far more extensive sales and development staffs and
significantly greater financial, marketing and other resources than we do.
There can be no assurance that we will be able to compete effectively
against such companies.

We Rely on Foreign Manufacturers

During 2003, approximately 96% of our products were manufactured in China.
Foreign manufacturing is subject to a number of risks, including
transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs, quotas and other import or export
controls, and changes in governmental policies. In addition, past
outbreaks of Severe Acute Respiratory Syndrome have been significantly
concentrated in Asia, particularly in Hong Kong and in the Guangdong
province of China, where many of our contract manufacturers are located.
The development and manufacture of our products could suffer if a
significant number of our employees in Hong Kong or the employees of our
contract manufacturers in China contract SARS or other communicable
diseases, or are otherwise unable to fulfill their responsibilities.

We do not have long-term contracts with our foreign manufacturers.
Although we believe we could secure other third-party manufacturers to
produce our products, our operations could be adversely affected if we lost
our relationship with several of our current foreign manufacturers.

Virtually all of the raw materials used in our products are available to our
contract manufacturers from numerous suppliers. Our manufacturers do not have
long-term supply contracts in place with their raw materials suppliers.
Accordingly, we are subject to variations in the prices we pay to our
manufacturers for products, depending on what they pay for their raw materials.
An increase in the cost of raw materials, such as petroleum, could result in
price increases which we may not be able to fully pass on to our customers.
Any such increase could negatively impact our business, financial condition or
results of operations.

26



---



##### Table of Contents



We Face Foreign Currency Risk

As part of our business, we enter into contracts for the purchase and sale
of products with entities in foreign countries. While the vast majority of
our contracts are denominated in U.S. dollars, significant fluctuations in
the local currencies of the entities with which we transact business may
adversely affect these entities abilities to fulfill their obligations
under their contracts.

Logistix Kids enters into contracts denominated primarily in U.S. dollars,
British pounds sterling and Euros. Although we attempt to reduce its
exposure to changes in foreign currency exchange rates through the use of
certain hedging techniques, changes in such exchange rates may result in
changes in the value of our commitments and anticipated foreign currency
cash flows.

A Significant Portion of Our Common Stock is Controlled by Our Officers and
Directors

Donald A. Kurz and Stephen P. Robeck beneficially own approximately 27% and
14%, respectively, of our outstanding Common Stock. Mr. Kurz is our
Chairman of the Board and Chief Executive Officer. Mr. Robeck is a member
of the Board of Directors. Crown owns 100% of the outstanding shares of our
Series A senior cumulative participating convertible preferred stock, which
are convertible into 1,694,915 shares of Common Stock (representing 23% of
the outstanding shares of Common Stock on an as converted basis). These
stockholders, either individually or acting together, significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business
combination transactions.

We May Issue Preferred Stock

Our Board of Directors has authority to issue up to one million shares of
preferred stock, and to fix the rights, preferences, privileges and
restrictions of those shares without any further vote or action by our
stockholders. The potential issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control and may
discourage bids for the Common Stock at a premium over the market price of
the Common Stock and may adversely affect the market price of, and the
voting and other rights of, the holders of Common Stock. The outstanding
Series A Stock is senior to any class of preferred stock which might be
authorized by the Board of Directors in the future.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Impact of Interest Rate Changes

The amounts borrowed under our credit facility are at variable interest
rates, and we are subject to market risk resulting from interest rate
fluctuations. No amounts were outstanding under our facility throughout
the year ended December 31, 2003.

Impact of Foreign Currency Fluctuation

Approximately 12% of our revenues are denominated in foreign currencies,
and we are subject to market risks resulting from fluctuations in foreign
currency exchange rates. In certain instances, we enter into foreign
currency exchange contracts in order to reduce exposure to changes in
foreign currency exchange rates that affect the value of our firm
commitments and certain anticipated foreign currency cash flows. We
currently intend to continue to enter into such contracts to hedge against
future material foreign currency exchange rate risks.

As of December 31, 2003, our Logistix Kids subsidiary entered into foreign
currency forward contracts aggregating GBP 3,296 to sell Euros in exchange
for pound sterling and to sell pound sterling in exchange for United States
dollars. The contracts will expire by September 2004. At December 31,
2003, the foreign currency forward contracts had an estimated fair value of
$(185). The fair value of the foreign currency forward contracts is
recorded in accrued liabilities in the consolidated balance sheet as of
December 31, 2003. The unrealized loss on the contracts is reflected in
accumulated other comprehensive income.

27



---



##### Table of Contents






ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Auditors

To the Board of Directors of
Equity Marketing, Inc. and Subsidiaries

In our opinion, the accompanying consolidated balance sheets as of December
31, 2002 and 2003 and the related consolidated statements of operations, of
shareholders equity and mandatory redeemable preferred stock, of
comprehensive income and of cash flows present fairly, in all material
respects, the financial position of Equity Marketing, Inc. and its
subsidiaries (the Company) at December 31, 2002 and 2003, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 2003 are in conformity with accounting principles
generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. The
financial statements of the Company for the year ended December 31, 2001,
were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on those
financial statements in their report dated February 27, 2002.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill
in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Los Angeles, California
February 20, 2004

28



---



##### Table of Contents



THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP.
THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR
ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM
10-K.

Report of Independent Public Accountants

To Equity Marketing, Inc.:

We have audited the accompanying consolidated balance sheets of Equity
Marketing, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2000 and 2001, and the related consolidated statements of operations,
stockholders equity and mandatory redeemable preferred stock,
comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Equity
Marketing, Inc. and subsidiaries as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP

Los Angeles, California
February 27, 2002

29



---



##### Table of Contents



EQUITY MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------ | ------------ | ------- | ---- | ------ | ------- | ------- | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        | December 31,
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |             
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        | 2002         |         | 2003
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |     
|ASSETS                                                                                                                                                                                                                            |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |        
|CURRENT ASSETS:                                                                                                                                                                                                                   |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |        
|                                                                                                                                                                                                                                  | Cash and cash equivalents                                                                                                                                        |                                                                                  | $      | 25,833       |         |      | $      | 19,291  |        
|                                                                                                                                                                                                                                  | Marketable securities                                                                                                                                            |                                                                                  |        | 1,000        |         |      |        |        |        
|                                                                                                                                                                                                                                  | Accounts receivable (net of allowances of $2,033 and $2,143
as of December 31, 2002 and 2003, respectively)                                                      |                                                                                  |        | 43,817       |         |      |        | 36,765  |        
|                                                                                                                                                                                                                                  | Inventories                                                                                                                                                      |                                                                                  |        | 16,363       |         |      |        | 15,099  |        
|                                                                                                                                                                                                                                  | Deferred income taxes                                                                                                                                            |                                                                                  |        | 3,038        |         |      |        | 2,303   |        
|                                                                                                                                                                                                                                  | Prepaid expenses and other current assets                                                                                                                        |                                                                                  |        | 1,769        |         |      |        | 2,049   |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total current assets                                                             |        |              | 91,820  |      |        |         | 75,507  | 
|Fixed assets, net                                                                                                                                                                                                                 |                                                                                                                                                                  |                                                                                  | 4,185  |              |         |      | 3,809  |        
|Goodwill                                                                                                                                                                                                                          |                                                                                                                                                                  |                                                                                  | 33,730 |              |         |      | 41,893 |        
|Other intangibles, net                                                                                                                                                                                                            |                                                                                                                                                                  |                                                                                  | 769    |              |         |      | 1,252  |        
|Deferred income taxes                                                                                                                                                                                                             |                                                                                                                                                                  |                                                                                  | 584    |              |         |      | 2,833  |        
|Other assets                                                                                                                                                                                                                      |                                                                                                                                                                  |                                                                                  | 2,166  |              |         |      | 3,036  |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total assets                                                                     |        | $            | 133,254 |      |        | $       | 128,330 | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|LIABILITIES, MANDATORY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY                                                                                                                                                       
|CURRENT LIABILITIES:                                                                                                                                                                                                              |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |        
|                                                                                                                                                                                                                                  | Short-term debt                                                                                                                                                  |                                                                                  | $      |             |         |      | $      |        |        
|                                                                                                                                                                                                                                  | Accounts payable                                                                                                                                                 |                                                                                  |        | 38,334       |         |      |        | 28,865  |        
|                                                                                                                                                                                                                                  | Due to customer                                                                                                                                                  |                                                                                  |        | 11,087       |         |      |        | 5,276   |        
|                                                                                                                                                                                                                                  | Accrued payroll and payroll related costs                                                                                                                        |                                                                                  |        | 1,677        |         |      |        | 1,051   |        
|                                                                                                                                                                                                                                  | Accrued liabilities                                                                                                                                              |                                                                                  |        | 11,565       |         |      |        | 10,868  |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total current liabilities                                                        |        |              | 62,663  |      |        |         | 46,060  | 
|Long-term liabilities                                                                                                                                                                                                             |                                                                                                                                                                  |                                                                                  | 1,596  |              |         |      | 5,555  |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total liabilities                                                                |        |              | 64,259  |      |        |         | 51,615  | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|COMMITMENTS AND CONTINGENCIES (Note 10) :                                                                                                                                                                                         |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |        
|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, 50,000,000
shares authorized, 5,716,503 and 5,684,953 shares
outstanding as of December 31, 2002 and
2003, respectively |                                                                                  |        |             |         |      |        |        |        
|                                                                                                                                                                                                                                  | Additional paid-in capital                                                                                                                                       |                                                                                  |        | 21,641       |         |      |        | 23,886  |        
|                                                                                                                                                                                                                                  | Retained earnings                                                                                                                                                |                                                                                  |        | 38,689       |         |      |        | 45,138  |        
|                                                                                                                                                                                                                                  | Accumulated other comprehensive income                                                                                                                           |                                                                                  |        | 1,710        |         |      |        | 3,334   |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              | 62,040  |      |        |         | 72,358  | 
|Less                                                                                                                                                                                                                             |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |        
|                                                                                                                                                                                                                                  | Treasury stock, 3,007,108 and 3,150,708 shares at cost as of December 31, 2002
and 2003, respectively                                                            |                                                                                  |        | (15,506      | )       |      |        | (17,458 | )      
|                                                                                                                                                                                                                                  | Unearned compensation                                                                                                                                            |                                                                                  |        | (588         | )       |      |        | (1,234  | )      
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total stockholders equity                                                       |        |              | 45,946  |      |        |         | 53,666  | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total liabilities, mandatory redeemable preferred stock and
stockholders equity |        | $            | 133,254 |      |        | $       | 128,330 | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                                                                  |        |              |         |      |        |         |        

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

30



---



##### Table of Contents



EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |           |        |        | 
|------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------ | --------- | ------------------------ | ------ | ------- | --------- | ------ | ------ | ------- | --------- | ------ | ------ | 
|                                                                                                  |                                                                                           |                                     |                          |           | Years Ended December 31,
|                                                                                                  |                                                                                           |                                     |                          |           |                         
|                                                                                                  |                                                                                           |                                     |                          |           | 2001                     |        | 2002    |           | 2003  
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |       
|REVENUES                                                                                          |                                                                                           | $                                   | 144,316                  |           |                          | $      | 206,832 |           |        | $      | 219,113 |          
|Cost of sales                                                                                     |                                                                                           |                                     | 104,129                  |           |                          |        | 151,307 |           |        |        | 158,117 |          
|Forgiveness of note receivable                                                                    |                                                                                           |                                     |                         |           |                          |        | 1,685   |           |        |        |        |          
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|Gross profit                                                                                      |                                                                                           |                                     | 40,187                   |           |                          |        | 53,840  |           |        |        | 60,996  |          
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|OPERATING EXPENSES:                                                                               |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  |                                                                                           | Salaries, wages and benefits        |                          |           | 15,924                   |        |         |           | 20,662 |        |         |           | 24,523 |       
|                                                                                                  |                                                                                           | Selling, general and administrative |                          |           | 18,323                   |        |         |           | 22,423 |        |         |           | 24,576 |       
|                                                                                                  |                                                                                           | Integration costs                   |                          |           | 192                      |        |         |           | 453    |        |         |           |       |       
|                                                                                                  |                                                                                           | Restructuring charge                |                          |           |                         |        |         |           | 178    |        |         |           | 234    |       
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  |                                                                                           |                                     | Total operating expenses |           |                          | 34,439 |         |           |        | 43,716 |         |           |        | 49,333 | 
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  |                                                                                           |                                     | Income from operations   |           |                          | 5,748  |         |           |        | 10,124 |         |           |        | 11,663 | 
|OTHER (EXPENSE) INCOME:                                                                           |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  |                                                                                           | Interest expense                    |                          |           | (249                     | )      |         |           | (258   | )      |         |           | (221   | )     
|                                                                                                  |                                                                                           | Interest income                     |                          |           | 1,695                    |        |         |           | 321    |        |         |           | 152    |       
|                                                                                                  |                                                                                           | Other income (expense)              |                          |           | (76                      | )      |         |           | 320    |        |         |           | 458    |       
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|Income before provision for income taxes and cumulative
effect of change in accounting principles |                                                                                           |                                     | 7,118                    |           |                          |        | 10,507  |           |        |        | 12,052  |          
|PROVISION FOR INCOME TAXES                                                                        |                                                                                           |                                     | 2,517                    |           |                          |        | 3,786   |           |        |        | 4,103   |          
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|Income before cumulative effect of change                                                         |                                                                                           |                                     | 4,601                    |           |                          |        | 6,721   |           |        |        | 7,949   |          
|                                                                                                  | in accounting principles
Cumulative effect of change in accounting principles,
net of tax |                                     |                          |          |                          |        |         | (2,496    | )      |        |         |          |       
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  |                                                                                           |                                     | Net Income               |           |                          | 4,601  |         |           |        | 4,225  |         |           |        | 7,949  | 
|PREFERRED STOCK DIVIDENDS                                                                         |                                                                                           |                                     | 1,500                    |           |                          |        | 1,500   |           |        |        | 1,500   |          
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|NET INCOME AVAILABLE TO COMMON STOCKHOLDERS                                                       |                                                                                           | $                                   | 3,101                    |           |                          | $      | 2,725   |           |        | $      | 6,449   |          
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|BASIC INCOME PER SHARE:                                                                           |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|Income per share before cumulative effect of change
in accounting principles                      |                                                                                           | $                                   | 0.52                     |           |                          | $      | 0.91    |           |        | $      | 1.13    |          
|Cumulative effect of change in accounting principles                                              |                                                                                           |                                     |                         |           |                          |        | (0.44   | )         |        |        |        |          
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  | BASIC INCOME PER SHARE                                                                    |                                     | $                        | 0.52      |                          |        | $       | 0.48      |        |        | $       | 1.13      |       
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  | BASIC WEIGHTED AVERAGE SHARES OUTSTANDING                                                 |                                     |                          | 5,996,662 |                          |        |         | 5,721,790 |        |        |         | 5,718,548 |       
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|DILUTED INCOME PER SHARE:                                                                         |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|Income per share before cumulative effect of change
in accounting principles                      |                                                                                           | $                                   | 0.50                     |           |                          | $      | 0.89    |           |        | $      | 1.03    |          
|Cumulative effect of change in accounting principles                                              |                                                                                           |                                     |                         |           |                          |        | (0.33   | )         |        |        |        |          
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  | DILUTED INCOME PER SHARE                                                                  |                                     | $                        | 0.50      |                          |        | $       | 0.56      |        |        | $       | 1.03      |       
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          
|                                                                                                  | DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING                                               |                                     |                          | 6,164,154 |                          |        |         | 7,590,018 |        |        |         | 7,712,633 |       
|                                                                                                  |                                                                                           |                                     |                          |           |                          |        |         |           |        |        |         |          

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

31



---



##### Table of Contents



EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND MANDATORY REDEEMABLE PREFERRED STOCK
(in thousands, except share data)



|                           |                                                       |  |           |              |   |                 |   |            |  |          |        |         |  |          |        |   |  |   |        |       |   |   |        |        |   | 
|-------------------------- | ----------------------------------------------------- |  | --------- | ------------ | - | --------------- | - | ---------- |  | -------- | ------ | ------- |  | -------- | ------ | - |  | - | ------ | ----- | - | - | ------ | ------ | - | 
|                           |                                                       |  |           | Common Stock |   | Preferred Stock |   | Additional |  |          |        |        
|                           |                                                       |  |           |              |   |                 |   | Paid-in    |  | Retained
|                           |                                                       |  |           | Shares       |   | Amount          |   | Shares     |  | Amount   |        | Capital |  | Earnings
|                           |                                                       |  |           |              |   |                 |   |            |  |          |        |         |  |         
|Balance, December 31, 2000 |                                                       |  | 6,141,396 |              |   | $               |  |            |  |          | 25,000 |         |  | $        | 23,049 |   |  | $ | 18,209 |       |   | $ | 32,863 |       
|                           | Net income                                            |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        | 4,601  |  
|                           | Amortization of restricted stock grants               |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Exercise of stock options                             |  |           | 236,607      |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 1,284 |   |   |        |       |  
|                           | Tax benefit from exercise of stock options            |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 557   |   |   |        |       |  
|                           | Preferred stock dividends                             |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        | (1,500 | )
|                           | Foreign currency translation adjustments              |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Unrealized gain on foreign currency forward contract  |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Purchase of treasury stock                            |  |           | (662,710     | ) |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Loan forgiveness                                      |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           |                                                       |  |           |              |   |                 |   |            |  |          |        |         |  |          |        |   |  |   |        |       |   |   |        |       
|Balance, December 31, 2001 |                                                       |  | 5,715,293 |              |   |                 |  |            |  |          | 25,000 |         |  |          | 23,049 |   |  |   | 20,050 |       |   |   | 35,964 |       
|                           | Net income                                            |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        | 4,225  |  
|                           | Issuance of shares pursuant to restricted
stock plan  |  |           | 50,000       |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 658   |   |   |        |       |  
|                           | Amortization of restricted stock grants               |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Exercise of stock options                             |  |           | 88,525       |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 840   |   |   |        |       |  
|                           | Tax benefit from exercise of stock options            |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 93    |   |   |        |       |  
|                           | Preferred stock dividends                             |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        | (1,500 | )
|                           | Foreign currency translation adjustments              |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Unrealized loss on foreign
currency forward contracts |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Purchase of treasury stock                            |  |           | (137,315     | ) |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           |                                                       |  |           |              |   |                 |   |            |  |          |        |         |  |          |        |   |  |   |        |       |   |   |        |       
|Balance, December 31, 2002 |                                                       |  | 5,716,503 |              |   |                 |  |            |  |          | 25,000 |         |  |          | 23,049 |   |  |   | 21,641 |       |   |   | 38,689 |       
|                           | Net income                                            |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        | 7,949  |  
|                           | Issuance of shares pursuant to restricted
stock plan  |  |           | 1,000        |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 13    |   |   |        |       |  
|                           | Issuance of restricted stock units                    |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 1,022 |   |   |        |       |  
|                           | Amortization of restricted stock units                |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Cancellation of restricted stock plan grants          |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | (26   | ) |   |        |       |  
|                           | Amortization of restricted stock grants               |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Exercise of stock options                             |  |           | 111,050      |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 935   |   |   |        |       |  
|                           | Tax benefit from exercise of stock options            |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        | 301   |   |   |        |       |  
|                           | Preferred stock dividends                             |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        | (1,500 | )
|                           | Foreign currency translation adjustments              |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Unrealized loss on foreign
currency forward contracts |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           | Purchase of treasury stock                            |  |           | (143,600     | ) |                 |   |           |  |          |        |        |  |          |        |  |  |   |        |      |   |   |        |       |  
|                           |                                                       |  |           |              |   |                 |   |            |  |          |        |         |  |          |        |   |  |   |        |       |   |   |        |       
|Balance, December 31, 2003 |                                                       |  | 5,684,953 |              |   | $               |  |            |  |          | 25,000 |         |  | $        | 23,049 |   |  | $ | 23,886 |       |   | $ | 45,138 |       
|                           |                                                       |  |           |              |   |                 |   |            |  |          |        |         |  |          |        |   |  |   |        |       |   |   |        |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                       |   |       |                   |   |          |         |              |   |              |     |       |  |   |        |        |   |   |        |        |   | 
|-------------------------- | ----------------------------------------------------- | - | ----- | ----------------- | - | -------- | ------- | ------------ | - | ------------ | --- | ----- |  | - | ------ | ------ | - | - | ------ | ------ | - | 
|                           |                                                       |   |       | Accumulated Other |   |          |         |              |   | Stock        |     |       |  |   |        |        |   |  
|                           |                                                       |   |       | Comprehensive     |   | Treasury |         | Subscription |   | Unearned     |     |       |  |  
|                           |                                                       |   |       | Income            |   | Stock    |         | Receivable   |   | Compensation |     | Total
|                           |                                                       |   |       |                   |   |          |         |              |   |              |     |      
|Balance, December 31, 2000 |                                                       | $ |      |                   |   | $        | (5,777  | )            |   | $            | (11 | )     |  | $ | (43    | )      |   | $ | 68,290 |       
|                           | Net income                                            |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 4,601  |  
|                           | Amortization of restricted stock grants               |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | 33     |   |   |        | 33     |  
|                           | Exercise of stock options                             |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 1,284  |  
|                           | Tax benefit from exercise of stock options            |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 557    |  
|                           | Preferred stock dividends                             |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | (1,500 | )
|                           | Foreign currency translation adjustments              |   |       | 213               |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 213    |  
|                           | Unrealized gain on foreign currency forward contract |   |       | 29                |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 29     |  
|                           | Purchase of treasury stock                            |   |       |                  |   |          |         | (7,996       | ) |              |     |      |  |   |        |       |   |   |        | (7,996 | )
|                           | Loan forgiveness                                      |   |       |                  |   |          |         |             |   |              |     | 11    |  |   |        |       |   |   |        | 11     |  
|                           |                                                       |   |       |                   |   |          |         |              |   |              |     |       |  |   |        |        |   |   |        |       
|Balance, December 31, 2001 |                                                       |   | 242   |                   |   |          | (13,773 | )            |   |              |    |       |  |   | (10    | )      |   |   | 65,522 |       
|                           | Net income                                            |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 4,225  |  
|                           | Issuance of shares pursuant to restricted
stock plan  |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | (658   | ) |   |        |       |  
|                           | Amortization of restricted stock grants               |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | 80     |   |   |        | 80     |  
|                           | Exercise of stock options                             |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 840    |  
|                           | Tax benefit from exercise of stock options            |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 93     |  
|                           | Preferred stock dividends                             |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | (1,500 | )
|                           | Foreign currency translation adjustments              |   |       | 1,523             |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 1,523  |  
|                           | Unrealized loss on foreign
currency forward contracts |   |       | (55               | ) |          |         |             |   |              |     |      |  |   |        |       |   |   |        | (55    | )
|                           | Purchase of treasury stock                            |   |       |                  |   |          |         | (1,733       | ) |              |     |      |  |   |        |       |   |   |        | (1,733 | )
|                           |                                                       |   |       |                   |   |          |         |              |   |              |     |       |  |   |        |        |   |   |        |       
|Balance, December 31, 2002 |                                                       |   | 1,710 |                   |   |          | (15,506 | )            |   |              |    |       |  |   | (588   | )      |   |   | 68,995 |       
|                           | Net income                                            |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 7,949  |  
|                           | Issuance of shares pursuant to restricted
stock plan  |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | (13    | ) |   |        |       |  
|                           | Issuance of restricted stock units                    |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | (1,022 | ) |   |        |       |  
|                           | Amortization of restricted stock units                |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | 186    |   |   |        | 186    |  
|                           | Cancellation of restricted stock plan grants          |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | 26     |   |   |        |       |  
|                           | Amortization of restricted stock grants               |   |       |                  |   |          |         |             |   |              |     |      |  |   |        | 177    |   |   |        | 177    |  
|                           | Exercise of stock options                             |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 935    |  
|                           | Tax benefit from exercise of stock options            |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 301    |  
|                           | Preferred stock dividends                             |   |       |                  |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | (1,500 | )
|                           | Foreign currency translation adjustments              |   |       | 1,784             |   |          |         |             |   |              |     |      |  |   |        |       |   |   |        | 1,784  |  
|                           | Unrealized loss on foreign
currency forward contracts |   |       | (160              | ) |          |         |             |   |              |     |      |  |   |        |       |   |   |        | (160   | )
|                           | Purchase of treasury stock                            |   |       |                  |   |          |         | (1,952       | ) |              |     |      |  |   |        |       |   |   |        | (1,952 | )
|                           |                                                       |   |       |                   |   |          |         |              |   |              |     |       |  |   |        |        |   |   |        |       
|Balance, December 31, 2003 |                                                       | $ | 3,334 |                   |   |          | (17,458 | )            |   | $            |    |       |  | $ | (1,234 | )      |   | $ | 76,715 |       
|                           |                                                       |   |       |                   |   |          |         |              |   |              |     |       |  |   |        |        |   |   |        |       

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

32



---



##### Table of Contents



EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

|                            |                                                             |   |                          |       |      |   |       |       |   |   |       |       |  
|--------------------------- | ----------------------------------------------------------- | - | ------------------------ | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                            |                                                             |   | Years Ended December 31,
|                            |                                                             |   |                         
|                            |                                                             |   | 2001                     |       | 2002 |   | 2003 
|                            |                                                             |   |                          |       |      |   |      
|NET INCOME                  |                                                             | $ | 4,601                    |       |      | $ | 4,225 |       |   | $ | 7,949 |      
|OTHER COMPREHENSIVE INCOME: |                                                             |   |                          |       |      |   |       |       |   |   |       |      
|                            | Foreign currency translation adjustments                    |   |                          | 213   |      |   |       | 1,523 |   |   |       | 1,784 |  
|                            | Unrealized gain (loss) on foreign currency forward contract |   |                          | 29    |      |   |       | (55   | ) |   |       | (160  | )
|                            |                                                             |   |                          |       |      |   |       |       |   |   |       |      
|                            | COMPREHENSIVE INCOME                                        |   | $                        | 4,843 |      |   | $     | 5,693 |   |   | $     | 9,573 |  
|                            |                                                             |   |                          |       |      |   |       |       |   |   |       |      

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

33



---



##### Table of Contents



EQUITY MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |         |   |        |  
|------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------ | ---------------------------------------------------- | ------- | ------------------------ | ------- | ------ | ------- | ---- | ------ | ------ | ------- | - | ------ | -
|                                                              |                                                                                   |                                                                  |        |                                                      |         | Years Ended December 31,
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                         
|                                                              |                                                                                   |                                                                  |        |                                                      |         | 2001                     |         | 2002   |         | 2003
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |       
|                                                              | Net income                                                                        |                                                                  | $      | 4,601                                                |         |                          | $       | 4,225  |         |      | $      | 7,949  |        
|                                                              | Adjustments to reconcile net income to net cash provided
by operating activities: |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              |                                                                                   | Cumulative effect of change in accounting principles, net of tax |        |                                                      |        |                          |         |        | 2,496   |      |        |        |        |  
|                                                              |                                                                                   | Depreciation and amortization                                    |        |                                                      | 2,477   |                          |         |        | 1,831   |      |        |        | 1,946   |  
|                                                              |                                                                                   | Provision for bad debts                                          |        |                                                      | 336     |                          |         |        | 484     |      |        |        | 277     |  
|                                                              |                                                                                   | Gain on asset disposal                                           |        |                                                      | (3      | )                        |         |        | (15     | )    |        |        | (19     | )
|                                                              |                                                                                   | Tax benefit from exercise of stock options                       |        |                                                      | 557     |                          |         |        | 93      |      |        |        | 301     |  
|                                                              |                                                                                   | Amortization of restricted stock                                 |        |                                                      | 33      |                          |         |        | 80      |      |        |        | 363     |  
|                                                              |                                                                                   | Forgiveness of note receivable                                   |        |                                                      |        |                          |         |        | 1,685   |      |        |        |        |  
|                                                              |                                                                                   | Other                                                            |        |                                                      | 14      |                          |         |        | (20     | )    |        |        | (1      | )
|                                                              | Changes in assets and liabilities-                                                |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              | Increase (decrease) in cash and cash equivalents:                                 |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              |                                                                                   | Accounts receivable                                              |        |                                                      | 9,733   |                          |         |        | (18,718 | )    |        |        | 12,338  |  
|                                                              |                                                                                   | Note receivable                                                  |        |                                                      | 6,139   |                          |         |        | 498     |      |        |        |        |  
|                                                              |                                                                                   | Inventories                                                      |        |                                                      | 3,442   |                          |         |        | (5,073  | )    |        |        | 2,294   |  
|                                                              |                                                                                   | Deferred income taxes                                            |        |                                                      | 1,304   |                          |         |        | (697    | )    |        |        | 559     |  
|                                                              |                                                                                   | Prepaid expenses and other current assets                        |        |                                                      | (1,674  | )                        |         |        | 4,207   |      |        |        | 963     |  
|                                                              |                                                                                   | Other assets                                                     |        |                                                      | 851     |                          |         |        | (542    | )    |        |        | (840    | )
|                                                              |                                                                                   | Accounts payable                                                 |        |                                                      | (447    | )                        |         |        | 14,645  |      |        |        | (13,892 | )
|                                                              |                                                                                   | Accrued liabilities                                              |        |                                                      | (14,608 | )                        |         |        | 5,811   |      |        |        | (9,486  | )
|                                                              |                                                                                   | Long-term liabilities                                            |        |                                                      | 128     |                          |         |        | (409    | )    |        |        | (791    | )
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              |                                                                                   |                                                                  |        | Net cash provided by operating activities            |         |                          | 12,883  |        |         |      | 10,581 |        |         |   | 1,961  |  
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |       
|                                                              | Payment for purchase of Contract Marketing, Inc. and U.S. Import &
Promotions Co. |                                                                  |        | (656                                                 | )       |                          |         |       |         |      |        |       |        
|                                                              | Payment for purchase of Logistix Limited, net of cash acquired of $1,750          |                                                                  |        | (11,405                                              | )       |                          |         |       |         |      |        |       |        
|                                                              | Payment for purchase of UPSHOT                                                    |                                                                  |        |                                                     |         |                          |         | (9,891 | )       |      |        |       |        
|                                                              | Payment for purchase of SCI, net of cash acquired of $162                         |                                                                  |        |                                                     |         |                          |         |       |         |      |        | (6,059 | )      
|                                                              | Proceeds from sales of fixed assets                                               |                                                                  |        | 36                                                   |         |                          |         | 135    |         |      |        | 74     |        
|                                                              | Purchases of fixed assets                                                         |                                                                  |        | (1,044                                               | )       |                          |         | (982   | )       |      |        | (1,150 | )      
|                                                              | Proceeds from sale of marketable securities, net                                  |                                                                  |        |                                                     |         |                          |         | 6,200  |         |      |        | 1,000  |        
|                                                              | Purchase of marketable securities, net                                            |                                                                  |        | (2,100                                               | )       |                          |         |       |         |      |        |       |        
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              |                                                                                   |                                                                  |        | Net cash used in investing activities                |         |                          | (15,169 | )      |         |      | (4,538 | )      |         |   | (6,135 | )
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |       
|                                                              | Preferred stock dividends paid                                                    |                                                                  |        | (1,500                                               | )       |                          |         | (1,500 | )       |      |        | (1,500 | )      
|                                                              | Purchase of treasury stock                                                        |                                                                  |        | (7,996                                               | )       |                          |         | (1,733 | )       |      |        | (1,952 | )      
|                                                              | Proceeds from exercise of stock options                                           |                                                                  |        | 1,284                                                |         |                          |         | 840    |         |      |        | 935    |        
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              |                                                                                   |                                                                  |        | Net cash used in financing activities                |         |                          | (8,212  | )      |         |      | (2,393 | )      |         |   | (2,517 | )
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              |                                                                                   |                                                                  |        | Net increase (decrease) in cash and cash equivalents |         |                          | (10,498 | )      |         |      | 3,650  |        |         |   | (6,691 | )
|Effects of exchange rate changes on cash and cash equivalents |                                                                                   |                                                                  | 28     |                                                      |         |                          | 248     |        |         |      | 149    |       
|CASH AND CASH EQUIVALENTS, beginning of year                  |                                                                                   |                                                                  | 32,405 |                                                      |         |                          | 21,935  |        |         |      | 25,833 |       
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|CASH AND CASH EQUIVALENTS, end of year                        |                                                                                   | $                                                                | 21,935 |                                                      |         | $                        | 25,833  |        |         | $    | 19,291 |       
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|CASH PAYMENTS DURING YEAR FOR:                                |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |       
|                                                              | Interest                                                                          |                                                                  | $      | 189                                                  |         |                          | $       | 286    |         |      | $      | 214    |        
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        
|                                                              | Taxes                                                                             |                                                                  | $      | 2,906                                                |         |                          | $       | 218    |         |      | $      | 4,166  |        
|                                                              |                                                                                   |                                                                  |        |                                                      |         |                          |         |        |         |      |        |        |        

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

34



---



##### Table of Contents






EQUITY MARKETING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

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

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

Logistix Limited, a United Kingdom corporation (Logistix), is a 100% owned
subsidiary of the Company which was acquired on July 31, 2001. 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.

The Companys UPSHOT division (UPSHOT), which was acquired on July, 17, 2003
is a marketing agency, specializing in promotion, event, collaborative marketing, retail design, and
environmental branding. UPSHOT has a reputation for creating highly
successful integrated marketing programs for world class brands such as Diageo,
Discover Financial Services, and Procter & Gamble.

The Companys SCI Promotion Group division (SCI), which was acquired on
September 3, 2003, is a promotional marketing services business
specializing in the development and execution of promotional campaigns that
utilize purchase-with-purchase, gift-with-purchase and incentives,
promotional licenses and promotional retail program, principally for the
retail department store industry.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant accounts and
transactions between the Company and its subsidiaries have been eliminated
in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.

Cash and Cash Equivalents

The Company considers all short-term investments with a maturity at the
date of purchase of three months or less to be cash equivalents.
Short-term investments included in cash and cash equivalents are valued at
cost, which approximates fair value as of December 31, 2002 and 2003.

Marketable Securities

In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities, the Company determines the appropriate classification
of marketable securities at the time of purchase and re-evaluates such
designation at each balance sheet date. Marketable securities have been
classified as available-for-sale and are carried at fair value.

35



---



##### Table of Contents



The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization, interest income,
realized gains and losses and declines in value judged to be other than
temporary are included in interest income and expense. The cost of
securities sold is based on specific identification.

Revenue Recognition

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

Service revenues include all amounts that are billable to clients under
service contracts. Service related revenues are recognized on a time and
materials basis, or on a straight-line basis, depending on the contract.
In the case of fee and production arrangements, the revenues are recognized
as the services are performed, which is generally ratably over the period
of the client contract. Revenues from time and materials service contracts
are recognized as the services are rendered. Revenues from fixed price
retainer contracts are recognized on a straight-line basis over the
contract term. Losses on contracts are recognized during the period in
which the loss first becomes probable and reasonably estimable.
Reimbursements, including those relating to travel and other out-of-pocket
expenses, and other similar third-party costs, such as printing costs, are
included in revenues, and an equivalent amount of reimbursable expenses are
included in cost of sales. Service revenues for the years ended December
31, 2001, 2002 and 2003 totaled $3,215, $13,895 and $22,129, respectively.
Unbilled revenues represent revenues recognized in advance of billings
rendered based on work performed to date on certain service contracts.
Unbilled revenues as of December 31, 2002 and 2003, respectively, totaled
$230 and $992, respectively. Unbilled revenues are recorded in accounts
receivable in the accompanying consolidated balance sheet as of December
31, 2003. Unbilled revenues are expected to be billed and collected within
the next six months.

In May 2003, the Emerging Issues Task Force (EITF) issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company was required to adopt the provisions of this Issue which had
a favorable impact of approximately $1,000, before taxes, on our results of
operations for the year ended December 31, 2003. Under new contractual
arrangements with Burger King, creative services are a separate deliverable
from manufacturing services. As a result, the Company is required to record
the creative revenues when the specification and engineering package is
delivered to and accepted by Burger King.

The Companys revenue recognition policies are in compliance with the
Securities and Exchange Commissions Staff Accounting Bulletins (SAB) No.
101: Revenue Recognition in Financial Statements and SAB No. 104
Revenue Recognition in Financial Statements.

Inventories

Inventories consist of (a) production-in-process which primarily represents tooling
costs which are deferred and amortized over the live of the products and deferred costs on
service contracts and (b) purchased finished goods held for sale to customers and purchased finished
goods in transit to customers distribution centers.
Inventories are stated at the lower of average cost or market. As of
December 31, 2001 and 2002, inventories consisted of the following:

|                      |  |              |        |      |  |   |        | 
|--------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                      |  | December 31,
|                      |  |             
|                      |  | 2002         |        | 2003
|                      |  |              |        |     
|Production-in-process |  | $            | 5,062  |      |  | $ | 3,363  | 
|Finished goods        |  |              | 11,301 |      |  |   | 11,736 | 
|                      |  |              |        |      |  |   |        | 
|                      |  | $            | 16,363 |      |  | $ | 15,099 | 
|                      |  |              |        |      |  |   |        | 

Fixed Assets

Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a
straight-line basis over estimated useful lives as follows:



| | Leasehold improvements  lesser of lease term or life of related asset
| | ----------------------------------------------------------------------

| | Furniture, fixtures, equipment, hardware and software  3-7 years
| | -----------------------------------------------------------------

Betterments, which extend the life or add value to fixed assets are
capitalized and depreciated over their remaining useful life. Repairs and
maintenance are expensed as incurred.

36



---



##### Table of Contents



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

Goodwill and Other Intangibles

SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets were approved by the Financial Accounting Standards Board
(FASB) effective June 30, 2001 for business combinations consummated after
June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method for
business combinations and requires use of the purchase method. SFAS No. 142
changes the accounting for goodwill and certain other intangible assets from an
amortization approach to a non-amortization (impairment) approach. The
statement required amortization of goodwill recorded in connection with
previous business combinations to cease upon adoption of the statement by
calendar year companies on January 1, 2002. The statement required the Company
to perform a transitional goodwill impairment test, using values as of January
1, 2002. The Company completed the goodwill transitional impairment test in
the second quarter of 2002. As a result, the Company determined that a
non-cash charge in the amount of $2,496, net of tax, was required relating to
the goodwill resulting from the 1998 acquisition of Contract Marketing, Inc.
and U.S. Import and Promotions Co., collectively referred to as USI. The
transition charge is reflected as a cumulative effect of change in accounting
principles effective January 1, 2002, and therefore, results for the quarter
ended March 31, 2002 have been adjusted retroactively. Subsequent to the
transition charge, the balance of the USI goodwill was $8,198. The Company has
adopted the provisions of these statements for the acquisition of Logistix (see
Note 4) effective July 1, 2001 and for all other acquisitions effective January
1, 2002. Accordingly, beginning on January 1, 2002, the Company has foregone
all related goodwill amortization expense.

Prior to implementing SFAS No. 142, the Company reviewed all goodwill assets
for impairment under the methodology of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
The undiscounted cash flows associated with all goodwill were in excess of the
book value of the related goodwill, including USI goodwill. Therefore,for the
year ended December 31, 2001, no goodwill, including USI goodwill, were
considered impaired under SFAS No. 121. See Note 3, Impairment of Assets.

Under the provisions of SFAS No. 142, the carrying value of assets
acquired, including goodwill, are reviewed annually. During such a review
the Company will estimate the fair value of the reporting unit to which the
assets were assigned by discounting the reporting units estimated future
cash flows before interest. The Company will compare the discounted
future cash flows to the carrying value of the acquired net assets to
determine if an impairment loss has occurred. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying value of the assets exceeds their
estimated fair values. In the fourth quarter of 2003, the Company
performed its most recent annual impairment test required by SFAS No. 142
and determined that its goodwill was not impaired as of December 31, 2003.

Goodwill represents the excess of the purchase price of acquisitions over
the estimated fair values of the net assets acquired. For the years ended
December 31, 2001, 2002 and 2003, amortization expense for goodwill
amounted to $759, $0 and $0, respectively. Goodwill relating to
acquisitions consummated on or after July 1, 2001 is not amortized.

For the year ended December 31, 2001, the reconciliation of reported net income
and diluted income per share to adjusted net income and adjusted diluted net
income per share reflecting the elimination of goodwill amortization is as
follows:

|                                                                   |  |                          |       | 
|------------------------------------------------------------------ |  | ------------------------ | ----- | 
|                                                                   |  | Years Ended December 31,
|                                                                   |  | 2001                    
|                                                                   |  |                         
|Net income available to common stockholders, as reported           |  | $                        | 3,101 | 
|Add back: Elimination of goodwill amortization (net of tax effect) |  |                          | 485   | 
|                                                                   |  |                          |       | 
|Net income available to common stockholders, as adjusted           |  | $                        | 3,586 | 
|                                                                   |  |                          |       | 
|Diluted income per share
Income per share, as reported             |  | $                        | 0.50  | 
|Add back: Elimination of goodwill amortization (net of tax effect) |  |                          | 0.08  | 
|                                                                   |  |                          |       | 
|Income per share, as adjusted                                      |  | $                        | 0.58  | 
|                                                                   |  |                          |       | 

The change in the carrying amount of goodwill from $33,730 as of December 31,
2002 to $41,893 as of December 31, 2003 reflects: the acquisition of SCI of
$3,909, an adjustment to reflect the net increase to goodwill for the Upshot
acquisition of $2,782, and a foreign currency translation adjustment of $1,472.
Of the goodwill balance, $8,317 relates to the consumer products segment and
$33,576 relates to the marketing services segment.

Identifiable intangibles of $769 and $1,252 as of December 31, 2002 and 2003,
respectively, a portion of which are subject to amortization,

37



---



##### Table of Contents



are included in other intangibles in the consolidated balance sheets.

Other intangibles are summarized as follows:

|                                                      |          |   |                          |     |      |   |       |       | 
|----------------------------------------------------- | -------- | - | ------------------------ | --- | ---- | - | ----- | ----- | 
|                                                      |          |   | Years Ended December 31,
|                                                      |          |   |                         
|                                                      |          |   | 2002                     |     | 2003
|                                                      |          |   |                          |     |     
|Amortized Intangible Assets                           |          |   |                          |     |      |   |       |      
|Equity Marketing, Inc. trademark                      |          | $ | 52                       |     |      | $ | 52    |      
|Licensing, royalty and standstill agreements          |          |   | 136                      |     |      |   | 151   |      
|Customer contracts and related customer relationships |          |   | 238                      |     |      |   | 869   |      
|Sales order backlog                                   |          |   | 218                      |     |      |   | 343   |      
|                                                      |          |   |                          |     |      |   |       |      
|                                                      | Subtotal |   |                          | 644 |      |   |       | 1,415 | 
|Less: Accumulated amortization                        |          |   | (461                     | )   |      |   | (813  | )    
|                                                      |          |   |                          |     |      |   |       |      
|                                                      |          |   | 183                      |     |      |   | 602   |      
|Unamortized Intangible Assets                         |          |   |                          |     |      |   |       |      
|Logistix trademark                                    |          |   | 586                      |     |      |   | 650   |      
|                                                      |          |   |                          |     |      |   |       |      
|Total Other Intangibles                               |          | $ | 769                      |     |      | $ | 1,252 |      
|                                                      |          |   |                          |     |      |   |       |      

The Equity Marketing, Inc. trademark is being amortized over an estimated
useful life of 10 years. The Logistix trademark is not subject to
amortization under the provisions of SFAS No. 142 as it has been determined
that it has an indefinite life. (see Note 4). The licensing, royalty and standstill agreements along with the
customer contracts and related customer relationships acquired in the
purchase of Logistix were amortized over the lives of the respective
agreements which ranged from 2 to 3 years and were fully amortized as of December 31, 2003. The sales order backlog was also
acquired in the purchase of Logistix and was fully amortized as of December
31, 2001. (See Note 4). The customer contracts and related customer
relationships acquired in the purchase of UPSHOT are amortized over the
lives of the respective agreements which range from 6 to 12 months and were fully amortized as of December 31, 2003. Sales order backlog was also acquired in the purchase of UPSHOT and was
fully amortized as of December 31, 2002. (See Note 4). The customer
contracts and related customer relationships acquired in the purchase of
SCI are amortized over an estimated useful life of 5 years. Sales order backlog was also acquired in the
purchase of SCI and was fully amortized as of December 31, 2003. (See Note
4). For the years ended December 31, 2001, 2002 and 2003, amortization
expense related to other intangibles amounted to $186, $234 and $309,
respectively. The expected future amortization expense related to other
intangibles is $124 per year through December 31, 2008.

Due to Customer

Pursuant to the terms of certain contracts between the Company and a
promotions customer, the Company collects fees from the customers
distribution companies on behalf of that customer. Once these fees are
collected from the distribution companies, the Company remits the fees to
the customer. As of December 31, 2002 and 2003, the amounts due to customer
were $11,087 and $5,276, respectively.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns, but not
both. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statements and tax basis of
assets and liabilities using the tax rates in effect for the years in which
the differences are expected to reverse. See Note 9.

Stock-Based Compensation

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

38



---



##### Table of Contents



At December 31, 2003, the Company has one stock option plan that is
described in Note 8. In accordance with provisions of SFAS No. 123, the
Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plan and, accordingly, does not recognize compensation
cost for grants whose exercise price equals the market price of the stock
on the date of grant. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as
prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the table below:

|                                                          |  |      |       |      |  |      |       |  |  |   |       | 
|--------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                          |  | 2001 |       | 2002 |  | 2003
|                                                          |  |      |       |      |  |     
|Net income available to common stockholders  as reported |  | $    | 3,101 |      |  | $    | 2,725 |  |  | $ | 6,449 | 
|Less:                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Compensation expense (a)                                  |  |      | 1,352 |      |  |      | 1,504 |  |  |   | 1,476 | 
|                                                          |  |      |       |      |  |      |       |  |  |   |       | 
|Net income available to common stockholders  pro forma   |  | $    | 1,749 |      |  | $    | 1,221 |  |  | $ | 4,973 | 
|                                                          |  |      |       |      |  |      |       |  |  |   |       | 
|Earnings per share:                                       |  |      |       |      |  |      |       |  |  |   |       | 
|Basic earnings per share, as reported                     |  | $    | 0.52  |      |  | $    | 0.48  |  |  | $ | 1.13  | 
|Pro forma basic earnings per share                        |  | $    | 0.29  |      |  | $    | 0.21  |  |  | $ | 0.87  | 
|Diluted earnings per share, as reported                   |  | $    | 0.50  |      |  | $    | 0.56  |  |  | $ | 1.03  | 
|Pro forma diluted earnings per share                      |  | $    | 0.28  |      |  | $    | 0.36  |  |  | $ | 0.84  | 



|(a) |  | Determined under fair value based method for all awards, net of tax.
|--- |  | --------------------------------------------------------------------

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

The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:

|                                |  |                          |       |         |  |         |       |   |  |  |       |  
|------------------------------- |  | ------------------------ | ----- | ------- |  | ------- | ----- | - |  |  | ----- | -
|                                |  | Years Ended December 31,
|                                |  |                         
|                                |  | 2001                     |       | 2002    |  | 2003   
|                                |  |                          |       |         |  |        
|Expected dividend yield         |  |                          | 0.00  | %       |  |         | 0.00  | % |  |  | 0.00  | %
|Expected stock price volatility |  |                          | 62.65 | %       |  |         | 60.00 | % |  |  | 58.57 | %
|Risk free interest rate         |  |                          | 4.15  | %       |  |         | 2.95  | % |  |  | 1.90  | %
|Expected life of options        |  | 4 years                  |       | 4 years |  | 4 years

The weighted average fair value of options granted during 2001, 2002 and
2003 is $5.75, $6.08 and $5.89, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the companys stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, the existing models, in managements opinion, do
not necessarily provide a reliable single measure of the fair value of its
stock options.

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 less preferred stock dividend
requirements.

Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue Common Stock (as defined below) 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 1,579,666, 2,075,066 and 1,318,666 shares of the
Companys common stock (Common Stock), for the years ended December 31,
2001, 2002 and 2003, respectively, were excluded from the computation of
diluted EPS as they would have been anti-dilutive. For the year ended
December 31, 2001, preferred stock convertible into 1,694,915 shares of
Common Stock was excluded from the computation of diluted EPS as it would
have been anti-dilutive. For the years ended December 31, 2002 and 2003,
preferred stock convertible into 1,694,915 shares of Common Stock was
included in the computation of diluted EPS.

39



---



##### Table of Contents



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:



|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |       |       |   |  |   |           |           |  |   |      |  | 
|------------------------------ | ------------------------------------------------------------------ | --------------------------- | - | -------------------------------- | - | ------------- | - | --------- | ------- | ----------- | - | ------------- |  | --------- | ----- | ----- | - |  | - | --------- | --------- |  | - | ---- |  | 
|                               |                                                                    |                             |   | For the years ended December 31,
|                               |                                                                    |                             |   |                                 
|                               |                                                                    |                             |   | 2001                             |   | 2002         
|                               |                                                                    |                             |   |                                  |   |              
|                               |                                                                    |                             |   | Income                           |   | Shares        |   | Per Share |         | Income      |   | Shares        |  | Per Share
|                               |                                                                    |                             |   | (Numerator)                      |   | (Denominator) |   | Amount    |         | (Numerator) |   | (Denominator) |  | Amount   
|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |          
|Basic EPS:                     |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |       |       |   |  |   |           |           |  |   |     
|                               | Net income available to common
stockholders                        |                             | $ | 3,101                            |   |               |   | 5,996,662 |         |             | $ | 0.52          |  |           | $     | 2,725 |   |  |   | 5,721,790 |           |  | $ | 0.48 | 
|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |       |       |   |  |   |           |           |  |   |     
|Preferred stock dividends      |                                                                    |                             |  |                                  |   |               |  |           |         |             |   |               |  |           | 1,500 |       |   |  |  |           |           |  |   |     
|Effect of Dilutive Securities: |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |       |       |   |  |   |           |           |  |   |     
|                               |                                                                    | Options and warrants        |   |                                  |  |               |   |           | 167,492 |             |   |               |  |           |       |       |  |  |   |           | 173,313   |  |   |      |  | 
|                               |                                                                    | Restricted stock units      |   |                                  |  |               |   |           |        |             |   |               |  |           |       |       |  |  |   |           |          |  |   |      |  | 
|                               |                                                                    | Convertible preferred stock |   |                                  |  |               |   |           |        |             |   |               |  |           |       |       |  |  |   |           | 1,694,915 |  |   |      |  | 
|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |       |       |   |  |   |           |           |  |   |     
|Dilutive EPS:                  |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |       |       |   |  |   |           |           |  |   |     
|                               | Net income available to common
stockholders and assumed conversion |                             | $ | 3,101                            |   |               |   | 6,164,154 |         |             | $ | 0.50          |  |           | $     | 4,225 |   |  |   | 7,590,018 |           |  | $ | 0.56 | 
|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |       |       |   |  |   |           |           |  |   |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                               |                                                                    |                             |       |                                       |   |               |   |           |           |  |   |      |  | 
|------------------------------ | ------------------------------------------------------------------ | --------------------------- | ----- | ------------------------------------- | - | ------------- | - | --------- | --------- |  | - | ---- |  | 
|                               |                                                                    |                             |       | For the years ended December 31, 2003
|                               |                                                                    |                             |       |                                      
|                               |                                                                    |                             |       | Income                                |   | Shares        |   | Per Share
|                               |                                                                    |                             |       | (Numerator)                           |   | (Denominator) |   | Amount   
|                               |                                                                    |                             |       |                                       |   |               |   |          
|Basic EPS:                     |                                                                    |                             |       |                                       |   |               |   |           |           |  |   |     
|                               | Net income available to common
stockholders                        |                             | $     | 6,449                                 |   |               |   | 5,718,548 |           |  | $ | 1.13 | 
|                               |                                                                    |                             |       |                                       |   |               |   |           |           |  |   |     
|Preferred stock dividends      |                                                                    |                             | 1,500 |                                       |   |               |  |           |           |  |   |     
|Effect of Dilutive Securities: |                                                                    |                             |       |                                       |   |               |   |           |           |  |   |     
|                               |                                                                    | Options and warrants        |       |                                       |  |               |   |           | 242,466   |  |   |      |  | 
|                               |                                                                    | Restricted stock units      |       |                                       |  |               |   |           | 56,704    |  |   |      |  | 
|                               |                                                                    | Convertible preferred stock |       |                                       |  |               |   |           | 1,694,915 |  |   |      |  | 
|                               |                                                                    |                             |       |                                       |   |               |   |           |           |  |   |     
|Dilutive EPS:                  |                                                                    |                             |       |                                       |   |               |   |           |           |  |   |     
|                               | Net income available to common
stockholders and assumed conversion |                             | $     | 7,949                                 |   |               |   | 7,712,633 |           |  | $ | 1.03 | 
|                               |                                                                    |                             |       |                                       |   |               |   |           |           |  |   |     

Royalties

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

Concentration of Risk

Burger King, accounted for approximately 66%, 65% and 58% of the Companys
total revenues for the years ended December 31, 2001, 2002 and 2003,
respectively. The Company regularly extend credit to distribution companies in
connection with our business with Burger King, which more recently includes
the newly formed Supply Chain Services, LLC (SCS), which is a subsidiary
of Burger Kings franchisee purchasing cooperative Restaurant Services,
Inc (RSI). We began selling product to SCS in October, 2003. We anticipate that
sales to SCS will reach 70% of our sales to the Burger King System by the
end of 2004. Receivables from SCS are being guaranteed by RSI as required under our credit policy.  Because of RSIs established
credit history, the Company does not believe that this increase in concentration of receivables
has negatively impacted the overall credit risk. Failure by SCS or one or more distribution
companies to honor their payment obligations could have a material adverse effect on the
Companys operations.  The largest such distribution company accounted for 20.8, 20.5%
and 17.9% of the products purchased from us by the Burger King system for the years ended December 31, 2001,
2002 and 2003, respectively. The largest such distribution company accounted for 13.6% and 23.9% of accounts
receivable as of December 31, 2002 and 2003, respectively.

The Company purchases 96% of its manufactured products from suppliers
located in China. China currently enjoys normal trade relations (NTR)
status under US tariff laws, which provides a favorable category of US
import duties. Chinas NTR status became permanent on January 1, 2002,
following enactment of a bill authorizing such status upon Chinas
accession to the World Trade Organization, which occurred in December 2001.
This substantially reduces the possibility of China losing its NTR status,
which would result in increased costs for the Company. The impact of such
an event on the Company could be somewhat mitigated by the Companys
ability to source product for the US market from countries other than
China. However, there can be no assurance that the Company would be able
to obtain manufactured products under acceptable terms.

Comprehensive Income

The Company computes comprehensive income pursuant to SFAS No. 130,
Reporting Comprehensive Income. This statement establishes standards for
the reporting and display of comprehensive income and its components in
financial statements and thereby reports a measure of all changes in equity
of an enterprise that result from transactions and other economic events
other than transactions with owners. Total comprehensive income for the
Company includes net income and other comprehensive income items, including
unrealized gains or losses on foreign exchange forward contracts and
cumulative foreign currency translation adjustments.

Shipping and Handling Costs

In accordance with the Emerging Issues Task Force Issue 00-10, Accounting
for Shipping and Handling Fees and Costs, the Company classifies all
amounts billed to customers related to shipping and handling as revenues.
Shipping and handling costs are recorded in selling, general and
administrative expenses. For the years ended December 31, 2001, 2002 and
2003 such costs totaled $2,441, $2,584, and $2,312, respectively.

40



---



##### Table of Contents



Foreign Currency Translation

Net foreign exchange gains or losses resulting from the translation of
assets and liabilities of foreign subsidiaries whose functional currency is
not the United States dollar are recognized as a component of accumulated
other comprehensive income in stockholders equity. For subsidiaries with
transactions denominated in currencies other than their functional
currency, net foreign exchange transaction gains or losses are included in
determining net income. For the years ended December 31, 2001, 2002 and
2003, respectively, the net transaction gain on foreign exchange of $(76),
$305 and $438 were recorded in other income in the accompanying
consolidated statements of operations.

In accordance with the SFAS No. 52, Foreign Currency Translation, the
financial statements of Logistix are translated into U.S. dollars as
follows: assets and liabilities at year-end exchange rates; income and
expenses at average exchange rates; and shareholders equity at historical
exchange rates. Since the functional currency of Logistix is the British
Pound, the resulting translation adjustment is recorded as a component of
accumulated other comprehensive income in the accompanying consolidated
balance sheet. Translation adjustments are not tax-effected since they
relate to investments which are permanent in nature.

Derivative Instruments

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

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

The Company adopted SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities which amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance should be
applied prospectively.

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

As of December 31, 2003, the Companys Logistix subsidiary entered into
foreign currency forward contracts aggregating GBP 3,296 to sell Euros in
exchange for pound sterling and to sell pound sterling in exchange for
United States dollars. The contracts will expire by September 2004. At
December 31, 2003, the foreign currency forward contracts had an estimated
fair value of $(185). The fair value of the foreign currency forward
contracts is recorded in accrued liabilities in the consolidated balance
sheet as of December 31, 2003. The unrealized loss on the contracts is
reflected in accumulated other comprehensive income.

Advertising

Production costs of commercials and programming are charged to expense in
the period during which the production is first aired. The costs of other
advertising, promotion and marketing programs are charged to expense in the
period incurred.

41



---



##### Table of Contents



Recent Accounting Pronouncements

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

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair-value for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No.
148 is effective for fiscal years beginning after December 15, 2002. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
The adoption had no effect on the Companys consolidated financial position or
results of operations. The Company will continue to account for its
stock-based compensation plans under APB Opinion No. 25. See Note 1 in the
accompanying Notes to Consolidated Financial Statements.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, which addresses the consolidation of business enterprises (variable
interest entities) to which the usual condition (ownership of a majority voting
interest) of consolidation does not apply. The interpretation focuses on
financial interests that indicate control. It concludes that in the absence of
clear control through voting interests, a companys exposure (variable
interest) to the economic risks and potential rewards from the variable
interest entitys assets and activities are the best evidence of control.
Variable interests are rights and obligations that convey economic gains or
losses from changes in the values of the variable interest entitys assets and
liabilities. Variable interests may arise from financial instruments, service
contracts, nonvoting ownership interests and other arrangements. If an
enterprise holds a majority of the variable interests of an entity, it would be
considered the primary beneficiary. The primary beneficiary would be required
to include the assets, liabilities and the results of operations of the
variable interest entity in its financial statements. In December 2003, the
FASB issued a revision to FIN 46 to address certain implementation issues. The
adoption of FIN 46 and FIN 46 (revised) did not have an impact on the Companys
results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The guidance should be applied prospectively. The adoption of SFAS No.
149 did not have an impact on the Companys results of operations or financial
position.

In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity was issued, which requires that
certain financial instruments must now be accounted for as liabilities. The
financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some
of its shares in exchange for cash or other assets and certain obligations that
can be settled with shares of stock. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and were
applied to our existing financial instruments effective July 1, 2003, the
beginning of the first fiscal period after June 15, 2003. The adoption of SFAS
No. 150 on July 1, 2003, did not have an impact on our consolidated financial
statements or disclosures. The Companys mandatory redeemable preferred stock
does not have a fixed and determinable redemption date and, therefore, is not
impacted by the adoption of SFAS No. 150.

In May 2003, the EITF issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into
separate units of accounting for revenue recognition purposes, and if this
division is required, how the arrangement consideration should be allocated
among the separate units of accounting. The guidance in this Issue is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company has adopted the provisions of this Issue
which had a favorable impact of approximately $1,000, before taxes, on its
results of operations for the year ended December 31, 2003. Under new contractual
arrangements with Burger King, creative services are a separate deliverable
from manufacturing services. As a result, the Company is required to record the creative
revenues when the specification and engineering package is delivered to and accepted
by Burger King.

42



---



##### Table of Contents



2. RESTRUCTURING CHARGE

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

In connection with the restructuring plan, the Company also decided to close
UPSHOTs Richmond, Virginia office and eliminate certain positions at UPSHOTs
Chicago, Illinois office. Additionally, in 2003 the Company finalized its exit
plan with respect to vacating half of its leased space (approximately 30,000
square feet) at UPSHOTs Chicago, Illinois office. This resulted in an
adjustment to the liabilities recorded and an increase to goodwill of $1,900
for the present value of the remaining lease payments for the vacated office
space in excess of the estimated sub-lease income. The liabilities assumed in
connection with this restructuring plan totaled $3,535 and are included as part
of goodwill in accordance with EITF Issue No. 95-3, Recognition of Liabilities
in Connection with a Purchase Business Combination. $1,369 of these
liabilities were paid as of December 31, 2003.

In 2003, the Company recorded a restructuring charge of $424 which represents
severance for workforce reductions at its UPSHOT division. The UPSHOT business
did not achieve the expected level of contribution this year which is primarily
attributable to reduced marketing expenditures by a couple of its larger
clients. In order to bring its cost structure in line with the current
business volume, the Company eliminated eight positions at UPSHOT in December
2003. $58 of the restructuring charge was paid as of December 31, 2003. This
charge was partially offset by a $190 reversal of a restructuring reserve that
the Company established in 1998 relating to former consumer products licenses.
This reversal is attributable to the expiration of certain contractual rights.

3. IMPAIRMENT OF ASSETS

Refer to Note 1, Summary of Significant Accounting Policies  Goodwill and
Other Intangibles for discussion of goodwill impairment.

4. ACQUISITIONS

On July 23, 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, in exchange for
$14,659, plus related transaction costs of $429, and a commitment to pay
additional cash consideration based upon the results of operations of CMI
and USI during each calendar year through December 31, 2002. In August
1999, March 2000 and May 2001, $149, $349 and $556 respectively, were paid
to the stockholders of CMI and USI and allocated to goodwill. On December
3, 2001, the Company paid an additional $100 to the stockholders of CMI and
USI as additional cash consideration in settlement of the remaining
commitment. This amount was also allocated to goodwill. As of December
31, 2001, the excess of the purchase price over the estimated fair value of
the net assets acquired was $14,572 which has been recorded as goodwill and
was being amortized on a straight line basis over 20 years. As of January
1, 2002, upon adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, the Company recorded a non-cash transitional impairment charge in
the amount of $2,496, net of tax, to reduce USI goodwill to its fair value.
(See Note 1, Summary of Significant Accounting Policies-Goodwill and
Other Intangibles)

On July 31, 2001, the Company acquired 100% of the common stock of Logistix
in exchange for 8,500 British pounds ($12,144 as of July 31, 2001) in cash
plus related transaction costs of $1,011. As of July 31, 2001, Logistixs
cash and cash equivalents totaled $1,750. Thus, the total purchase price,
net of cash acquired, was $11,405. The acquisition was financed through
the Companys existing cash reserves. The Companys potential future
obligation to pay additional cash consideration based upon the results of
operations of Logistix through July 31, 2004 was extinguished in connection
with the settlement of a dispute regarding the calculation of certain
post-closing adjustments.

43



---



##### Table of Contents



The Logistix acquisition has been accounted under the purchase method of
accounting. The financial statements reflect the allocation of the
purchase price to the acquired net assets based on their estimated fair
values as of the acquisition date. During the year ended December 31,
2002, the preliminary allocation of the purchase price was adjusted to
revise the estimated value of the deferred tax liabilities and certain
accrued liabilities. These adjustments resulted in a net reduction to
goodwill of $94. The Companys allocation of purchase price for the
acquisition, based upon estimated fair values is as follows:

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

The above amounts are reported using the exchange rate in effect as of July
31, 2001. $522 of the $882 of acquired intangible assets was assigned to
the Logistix trademark, which is not subject to amortization. The
remaining $360 of intangible assets were amortized over estimated
useful lives ranging from 0.4 to 3 years. Intangible assets associated with
the Logistix acquisition are accounted for in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Goodwill has an indefinite life
and is not amortized.

On July 17, 2002, the Company consummated the acquisition of UPSHOT, a
marketing agency with expertise in promotion, event, collaborative and
environmental marketing. The Company financed the acquisition through its
existing cash reserves.
The acquisition was consummated pursuant to an Asset Purchase Agreement,
dated May 22, 2002, by and among the Company, Promotional Marketing, LLC
(Promotional Marketing) and HA-LO Industries, Inc. (HA-LO) (the
Purchase Agreement). Under the terms of the Purchase Agreement, the
Company acquired the principal assets of Promotional Marketing (consisting
of the principal assets used in connection with the operation of the UPSHOT
business) for $9,206 in cash plus related transaction costs of $685. The
Company assumed the principal current liabilities of the UPSHOT business in
connection with the acquisition. HA-LO, which is the parent company of
Promotional Marketing, is currently in Chapter 11 bankruptcy proceedings,
and the Companys acquisition of the UPSHOT business was approved by the
United States bankruptcy court.

The UPSHOT acquisition has been accounted for under the purchase method of
accounting. The financial statements reflect the allocation of the
purchase price to the acquired net assets based on their estimated fair
values as of the acquisition date. During 2003, the preliminary allocation
of the purchase price was adjusted to revise the estimated value of prepaid
expenses ($72 increase), deferred tax assets ($1,852 increase), accrued
liabilities ($168 decrease) and non-current liabilities ($4,874 increase).
These adjustments resulted in a net increase to goodwill of $2,782. The
adjustments to increase non-current liabilities are attributable to a final
determination of an unfavorable lease liability for UPSHOTs Chicago,
Illinois office totaling $2,975 and to an adjustment totaling $1,900 due to
the finalization of an exit plan (see Note 2  Restructuring Charge) both
of which were contemplated as of the close of the transaction. The
unfavorable lease liability reflects the present value of the lease
payments in excess of market for the remaining term of the Chicago office
lease. The increase in deferred tax assets reflects the tax benefit
associated with the increase in non-current liabilities. Subsequent to
these adjustments, the Companys allocation of purchase price for the
acquisition, based upon estimated fair values is as follows:

|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Net current assets                            |  | $ | 7,029  |  
|Property, plant and equipment                 |  |   | 700    |  
|Other non-current assets                      |  |   | 1      |  
|Net current liabilities                       |  |   | (7,783 | )
|Non-current liabilities                       |  |   | (4,874 | )
|                                              |  |   |        |  
|Estimated fair value, net liabilities assumed |  |   | (4,927 | )
|Goodwill                                      |  |   | 14,631 |  
|Other intangible assets                       |  |   | 187    |  
|                                              |  |   |        |  
|Total purchase price                          |  | $ | 9,891  |  
|                                              |  |   |        |  

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

44



---



##### Table of Contents



In connection with the UPSHOT acquisition, the Company formulated and
implemented an integration plan and incurred integration costs, including
travel, training and consulting costs. Such costs totaled $453 and were
recorded as integration costs in the consolidated statements of operations
for the year ended December 31, 2002.

On September 3, 2003, the Company acquired substantially all of the assets of
SCI, a privately held promotional marketing services company based in Ontario,
California. The Company financed the acquisition through its existing cash
reserves. The acquisition was consummated pursuant to an Asset Purchase
Agreement dated September 3, 2003, by and among the Company, SCI and Joseph J.
Schmidt, III (the Purchase Agreement). Under the terms of the Purchase
Agreement, the Company acquired substantially all of the assets of SCI for a
cash purchase price of approximately $5,900 (before closing balance sheet
working capital adjustment), plus additional earnout consideration of up to
$3,500 based upon future performance of the acquired business. Net of a
holdback of $250, the Company paid $5,683 in cash plus related transaction
costs of $538. The Company also assumed the operating liabilities of the
business in connection with the acquisition. The earnout consideration is based
upon the business achieving targeted levels of earning before interest, taxes,
depreciation and amortization (EBITDA) over the period from 2003 through
2006. The earnout payments, if required, are payable 50% in cash and 50% in
shares of the Companys common stock. The additional consideration, if any,
will be recorded as goodwill.

The SCI acquisition has been accounted for under the purchase method of
accounting. The financial statements reflect the preliminary allocation of the
purchase price to the acquired net assets based on their estimated fair values
as of the acquisition date. The Company is in the process of finalizing
valuations of the individual assets and liabilities which would result in an
adjustment to goodwill and other intangibles. The allocation of the purchase
price may change based upon these valuations. However, the Company does not expect
significant changes to the preliminary allocation of the purchase price. The allocation reflects a
receivable from SCI resulting from a closing balance sheet working capital
adjustment of $855, accruing interest at the rate of 5% per annum, that will
offset additional earnout consideration. This receivable is recorded in prepaid
expenses and other current assets in the Companys consolidated balance sheet
as of December 31, 2003. The Companys preliminary allocation of purchase price
for the acquisition, based upon estimated fair values is as follows:

|                                          |  |   |        |  
|----------------------------------------- |  | - | ------ | -
|Net current assets                        |  | $ | 6,437  |  
|Receivable from SCI                       |  |   | 855    |  
|Property, plant and equipment             |  |   | 37     |  
|Other non-current assets                  |  |   | 13     |  
|Net current liabilities                   |  |   | (5,742 | )
|                                          |  |   |        |  
|Estimated fair value, net assets acquired |  |   | 1,600  |  
|Goodwill                                  |  |   | 3,909  |  
|Other intangible assets                   |  |   | 728    |  
|                                          |  |   |        |  
|Total purchase price                      |  | $ | 6,237  |  
|                                          |  |   |        |  

The intangible assets of $728 are comprised of customer contracts and related
customer relationships and sales order backlog, and are being amortized over
estimated useful lives ranging from 4 months to 5 years. Intangible assets
associated with the SCI acquisition are accounted for in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets. Goodwill has an indefinite
life and is not amortized.

SCI was formed in June 2002 when SCIs management purchased the assets and
assumed certain liabilities of SCIs predecessor business from Aspen Marketing,
Inc. (a privately held promotions company). In conjunction with this
acquisition, SCIs management implemented a number of significant structural
changes in the business and ascribed different underlying basis to SCIs assets
and liabilities than previously ascribed by Aspen Marketing, Inc. As a result
of the acquisition and the changes in the business, the Companys management
believes that the financial information for SCI for the first half of 2002 is
not meaningful or relevant. The pro forma information shown below for 2002
excludes the impact of the SCI acquisition. The following selected unaudited
pro forma consolidated results of operations are presented as if the UPSHOT
acquisition had occurred as of the beginning of 2001 and as if the SCI
acquisition had occurred at the beginning of 2003 after giving effect to
certain adjustments for the amortization of intangibles, reduced interest
income and related income tax effects.

45



---



##### Table of Contents



The pro forma data is for informational purposes only and does not necessarily
reflect the results of operations had the businesses operated as one during the
period. No effect has been given for synergies, if any, that may have been
realized through the acquisitions.

|                                                      |  |                          |           |      |  |      |           |  |  |   |           | 
|----------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                      |  | Years Ended December 31,
|                                                      |  |                         
|                                                      |  | 2001                     |           | 2002 |  | 2003
|                                                      |  |                          |           |      |  |     
|Pro forma revenues                                    |  | $                        | 186,061   |      |  | $    | 220,509   |  |  | $ | 235,735   | 
|Pro forma net income (loss)                           |  | $                        | (4,492    | )    |  | $    | 2,960     |  |  | $ | 8,109     | 
|Pro forma basic income (loss) per share               |  | $                        | (1.00     | )    |  | $    | 0.26      |  |  | $ | 1.16      | 
|Pro forma diluted income (loss) per share             |  | $                        | (1.00     | )    |  | $    | 0.25      |  |  | $ | 1.05      | 
|Pro forma basic weighted average
shares outstanding   |  |                          | 5,996,662 |      |  |      | 5,721,790 |  |  |   | 5,718,548 | 
|Pro forma diluted weighted average
shares outstanding |  |                          | 5,996,662 |      |  |      | 5,895,103 |  |  |   | 7,712,633 | 

The pro forma net loss shown above for the year ended December 31, 2001 was
primarily attributable to UPSHOT. UPSHOTs overhead structure for 2001 was
intended to support higher revenue levels that did not materialize. Thus,
operating expenses were high relative to revenues. UPSHOTs operating
expenses in 2001 also included an asset impairment charge for the write
down of fixed assets as well as severance expense for workforce reductions.
Subsequent to the Companys acquisition of UPSHOT in 2002, UPSHOTs
operating expenses were reduced significantly to bring them in line with
current revenue levels. See Note 2, Restructuring Charge.

Refer to Note 1 for further discussion of the method of computation of earnings
per share.

5. FIXED ASSETS, NET

Fixed assets, net is summarized as follows:

|                                          |                       |   |              |        |      |   |        |        | 
|----------------------------------------- | --------------------- | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                                          |                       |   | December 31,
|                                          |                       |   |             
|                                          |                       |   | 2002         |        | 2003
|                                          |                       |   |              |        |     
|Furniture, fixtures and equipment         |                       | $ | 3,429        |        |      | $ | 3,462  |       
|Computer software                         |                       |   | 3,513        |        |      |   | 3,979  |       
|Computer hardware                         |                       |   | 4,093        |        |      |   | 4,546  |       
|Leasehold improvements                    |                       |   | 1,464        |        |      |   | 1,744  |       
|                                          |                       |   |              |        |      |   |        |       
|                                          | Fixed assets, at cost |   |              | 12,499 |      |   |        | 13,731 | 
|Accumulated depreciation and amortization |                       |   | (8,314       | )      |      |   | (9,922 | )     
|                                          |                       |   |              |        |      |   |        |       
|                                          | Fixed assets, net     |   | $            | 4,185  |      |   | $      | 3,809  | 
|                                          |                       |   |              |        |      |   |        |       

For the years ended December 31, 2001, 2002 and 2003, depreciation expense
related to fixed assets was $1,533, $1,597 and $1,636, respectively.

6. LINE OF CREDIT

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

As of December 31, 2002 and 2003, the marginal interest rate on available
borrowings under the respective credit agreements was 2.9% and 4.0%,
respectively. Letters of credit outstanding as of December 31, 2002 and
2003 totaled $823 and $1,829, respectively.

In addition to the Facility, in October, 2003 the Companys Logistix
subsidiary established an import/letter of credit facility with Hong Kong
Shanghai Bank Corp. (HSBC) to provide short-term financing of product
purchases from Asia. The total availability under this facility is 1,000 GBP. Under this facility HSBC may pay
Logistixs vendors directly upon receipt of invoices and

46



---



##### Table of Contents



shipping
documentation. Logistix in turn is obligated to repay HSBC within 120
days. Advances outstanding under this facility totaled approximately $626
as of December 31, 2003 and are recorded in accounts payable in the
accompanying consolidated balance sheet.

7. DEFINED CONTRIBUTION PLAN

The Company has a 401(k) Tax Deferred Savings Plan (the 401(k) Plan),
which became effective on January 1, 1992. The 401(k) Plan covers
substantially all of its eligible employees, as defined under the 401(k)
Plan. The Company makes annual contributions to the 401(k) Plan consisting
of a discretionary matching contribution equal to a determined percentage
of the employees contribution. Costs related to contributions to the
401(k) Plan for the years ended December 31, 2001, 2002, and 2003 were
$241, $303 and $522, respectively.

8. STOCKHOLDERS EQUITY

Stock Options
The Company currently has one stock option plan; the Equity Marketing, Inc.
2000 Stock Option Plan (the 2000 Employee Plan). A total of 1.5 million
shares of Common Stock are reserved for issuance pursuant to options
granted and to be granted under the 2003 Employee Plan. 525,775 shares are
available for grant under the 2000 Employee Plan as of December 31, 2003.
Options pursuant to the 2000 Employee Plan typically vest over three to
five years and expire ten years from the date of grant. The 2000 Employee
Plan expires in 2010.

The 2000 Employee Plan provide for option grants at exercise prices not
less than the fair market value on the date of grant in the case of
qualified incentive stock options, and not less than par value in the case
of non-qualified options.

Under the terms of the 2000 Employee Plan, the Company may issue awards of
restricted stock and restricted stock units upon such terms and conditions
as it may deem appropriate. See Restricted Stock below.

The Company previously had a 1996 Stock Option Plan, which expired in 2001,
and a Non-Employee Director Stock Option Plan, which expired in 2003
(together with the 2000 Employee Plan, collectively the Option Plans).

Transactions involving the Option Plans are summarized as follows:

|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       |  | 
|-------------------------------- | --------- |  | ----------- | -------- | ----------- |  | -------------- | ------ | ----------- | - | -------------- | ----- |  |  | -------------------------- |  | -------- | - | ----- |  | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  | Exercisable at End of Year
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                           
|                                 |           |  |             |          |             |  |                |        |             |   | Weighted       |       |  |  |                            |  | Weighted
|                                 |           |  |             |          |             |  | Restricted     |        | Average     |   |                |       |  |  | Average                   
|                                 |           |  | Options     |          | Stock       |  | Exercise Price |        | Number      |   | Exercise Price
|                                 |           |  | Outstanding |          | Outstanding |  | Per Share      |        | Exercisable |   | Shares        
|                                 |           |  |             |          |             |  |                |        |             |   |               
|Outstanding at December 31, 2000 |           |  | 1,664,820   |          |             |  |               |        |             | $ | 11.11          |       |  |  | 716,155                    |  |          | $ | 11.63 | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|                                 | Granted   |  |             | 645,400  |             |  |                |       |             |   |                | 11.56 |  |  |                            |  |          |   |       |  | 
|                                 | Exercised |  |             | (236,607 | )           |  |                |       |             |   |                | 5.35  |  |  |                            |  |          |   |       |  | 
|                                 | Canceled  |  |             | (114,835 | )           |  |                |       |             |   |                | 11.15 |  |  |                            |  |          |   |       |  | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|Outstanding at December 31, 2001 |           |  | 1,958,778   |          |             |  |               |        |             |   | 11.96          |       |  |  | 674,909                    |  |          | $ | 13.83 | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|                                 | Granted   |  |             | 507,000  |             |  |                | 50,000 |             |   |                | 12.92 |  |  |                            |  |          |   |       |  | 
|                                 | Exercised |  |             | (88,525  | )           |  |                |       |             |   |                | 9.48  |  |  |                            |  |          |   |       |  | 
|                                 | Canceled  |  |             | (142,875 | )           |  |                |       |             |   |                | 11.14 |  |  |                            |  |          |   |       |  | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|Outstanding at December 31, 2002 |           |  | 2,234,378   |          |             |  | 50,000         |        |             |   | 12.34          |       |  |  | 911,743                    |  |          | $ | 13.40 | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|                                 | Granted   |  |             | 120,000  |             |  |                | 78,750 |             |   |                | 13.48 |  |  |                            |  |          |   |       |  | 
|                                 | Exercised |  |             | (111,050 | )           |  |                |       |             |   |                | 8.42  |  |  |                            |  |          |   |       |  | 
|                                 | Canceled  |  |             | (80,800  | )           |  |                | (4,300 | )           |   |                | 13.48 |  |  |                            |  |          |   |       |  | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|Outstanding at December 31, 2003 |           |  | 2,162,528   |          |             |  | 124,450        |        |             | $ | 12.74          |       |  |  | 1,092,576                  |  |          | $ | 13.29 | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 

The following table summarizes information about the Companys stock
options and restricted stock outstanding and exercisable as of December 31,
2003:

|                       |  |                        |           |                  |  |                |          |             |          |                |       |  |  |  |           |  |  |   |       |  | 
|---------------------- |  | ---------------------- | --------- | ---------------- |  | -------------- | -------- | ----------- | -------- | -------------- | ----- |  |  |  | --------- |  |  | - | ----- |  | 
|OPTIONS AND RESTRICTED |  | OPTIONS AND RESTRICTED
|STOCK OUTSTANDING      |  | STOCK EXERCISABLE     
|                       |  |                       
|                       |  |                        |           |                  |  |                | WEIGHTED |             |          |                |       |  |  |  |           |  |  |   |      
|                       |  |                        |           |                  |  |                | AVERAGE  |             | WEIGHTED |                |       |  |  |  | WEIGHTED 
|RANGE OF               |  | NUMBER                 |           | REMAINING        |  | AVERAGE        |          | NUMBER      |          | AVERAGE       
|EXERCISE PRICES        |  | OUTSTANDING            |           | CONTRACTUAL LIFE |  | EXERCISE PRICE |          | EXERCISABLE |          | EXERCISE PRICE
|                       |  |                        |           |                  |  |                |          |             |          |               
|$0.00 - $9.94          |  |                        | 681,541   |                  |  |                | 5.48     |             |          | $              | 7.38  |  |  |  | 242,291   |  |  | $ | 7.33  | 
|$10.00 - $12.10        |  |                        | 610,937   |                  |  |                | 7.34     |             |          | $              | 11.30 |  |  |  | 298,685   |  |  | $ | 11.23 | 
|$12.25 - $13.39        |  |                        | 572,500   |                  |  |                | 7.80     |             |          | $              | 12.96 |  |  |  | 261,600   |  |  | $ | 12.80 | 
|$13.88 - $28.13        |  |                        | 422,000   |                  |  |                | 5.72     |             |          | $              | 19.44 |  |  |  | 290,000   |  |  | $ | 20.84 | 
|                       |  |                        |           |                  |  |                |          |             |          |                |       |  |  |  |           |  |  |   |       |  | 
|                       |  |                        | 2,286,978 |                  |  |                | 6.60     |             |          | $              | 12.05 |  |  |  | 1,092,576 |  |  | $ | 13.29 | 
|                       |  |                        |           |                  |  |                |          |             |          |                |       |  |  |  |           |  |  |   |       |  | 

47



---



##### Table of Contents



Warrants

On March 29, 2000 and June 20, 2000, the Company granted Crown 15,000
warrants to purchase additional shares of preferred stock. (see Preferred
Stock).

Preferred Stock

The Company has authorized 1,000,000 shares of preferred stock, par value
$.001 per share (Preferred Stock). The Board of Directors is empowered to
issue Preferred Stock from time to time in one or more series, without
stockholder approval, and to determine the rights, preferences and
restrictions, including dividend, conversion, voting, redemption (including
sinking fund provisions), and other rights, liquidation preferences and the
number of shares constituting any series and the designations of such
series.

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
were immediately exercisable. The conversion prices of the Series B Stock
and the Series C Stock was $16.00 and $18.00 per share, 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 additional Warrants to purchase another 6,288 shares of Series B
Stock and another 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 31, 2005. The Company paid $250 in fees for the year ended December
31, 2003.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the affairs of the Company, Crown, as holder of the Series A 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 stockholder 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 is subject to mandatory redemption at the option of the
holder 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 Series A 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. Total
dividends for the year ended December 31, 2003 amounted to $1,500, of which
$375 was paid in January 2004 and recorded in accounts payable in the
accompanying consolidated balance sheet as of December 31, 2003.

48



---



##### Table of Contents



Crown currently holds 100% of the outstanding shares of Series A Stock, and
consequently, has designated one individual to the Board of Directors of
the Company. Crown currently has the right to designate two additional
directors.

The Series A Stock is recorded in the accompanying 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

On July 21, 2000, the Companys Board of Directors authorized up to $10,000
for the repurchase of the Companys common stock over a twelve month
period. In the period from July 21, 2000 to July 21, 2001, the Company
spent $6,430 to purchase an aggregate of 523,594 shares at an average price
of $12.28 per share including commissions. On July 24, 2001, the Companys
Board of Directors authorized up to an additional $10,000 for the
repurchase of the Companys common stock over a twelve month period. In
the period from August 2, 2001 through July 11, 2002, the Company spent
$5,605 to purchase 454,715 shares at an average price of $12.33 per share
including commissions. On July 12, 2002, the Companys Board of Directors
authorized up to an additional $10,000 for the repurchase of the Companys
common stock. The Company spent $3,294 to repurchase 251,100 shares at an
average price of $13.12 per share including commissions under this
authorization through December 31, 2003. The duration of the current
buyback program is indefinite; provided, however, that the Companys Board
of Directors intends to review the program quarterly. Purchases are
conducted in the open market at prevailing prices, based on market
conditions when the Company is not in a quiet period. The Company may also
transact purchases effected as block trades, as well as certain negotiated,
off-exchange purchases not in the open market. Since initiating the
overall buyback program on July 20, 2000, the Company has spent $15,329 to
purchase a total of 1,229,409 shares at an average price of $12.47 per
share including commissions through December 31, 2003. This repurchase
program is being funded through working capital.

Restricted Stock

The Company has reserved 100,000 shares of common stock for issuance under
the 1995 Stock Award Plan, (the Plan), which covers certain key salaried
employees who are not officers or directors of the Company. For the years
ended December 31, 2002 and 2003, no shares were issued or canceled under
the Plan. The shares are subject to restrictions, which lapse over a three
to five year period and continued employment with the Company. Unearned
compensation was charged for the market value of the restricted shares as
these shares were issued in accordance with the Plan. A total of 97,487
shares have been issued under the Plan between 1995 and 1998. At December
31, 2003, 69,690 shares were available for issuance under the Plan.

As discussed above, under terms of the 2000 Employee Plan, the Company may
issue awards of restricted stock upon such terms and conditions as it may
deem appropriate subject to approval by the board of directors. For the
year ended December 31, 2002, 50,000 shares with an aggregate value on the
date of grant of $658 were issued under the plan. Unearned compensation
was charged for the market value of these restricted shares. The shares
are subject to restrictions, which lapse over a five year period and
continued employment with the Company.

The unearned compensation is shown as a reduction of stockholders equity
in the accompanying consolidated balance sheets and is being amortized
ratably over the restricted period. Compensation charged to expense was
$33, $80 and $177 in 2001, 2002 and 2003, respectively.

During the first quarter of 2003, the Companys Board of Directors approved
an amendment to the 2000 Employee Plan to permit the grant of restricted
stock units in addition to stock options, restricted stock grants and stock
bonuses previously provided for under the 2000 Employee Plan. Effective
April 1, 2003, a total of 74,650 restricted stock units with an aggregate
market value as of the grant date of $971 were granted to employees under
the 2000 Employee Plan. In September 2003, a total of 3,500 restricted
stock units with an aggregate market value as of the grant date of $51 were
granted to SCI employees under the 2000 Employee Plan. Unearned
compensation was charged upon grant for the market value of these
restricted stock units. The units vest over a four year period subject to
continued employment with the Company. Compensation expense attributable
to these units was $186 for 2003. The underlying shares of common stock
are issuable on the fourth anniversary of the date of grant; provided,
however, that shares underlying vested restricted stock units are issuable
earlier upon termination of employment, disability or hardship.

49



---



##### Table of Contents



9. INCOME TAXES

In accordance with SFAS No. 109, Accounting for Income Taxes, deferred
income taxes reflect the impact of temporary differences between values
recorded for assets and liabilities for financial reporting purposes and
the values utilized for measurement in accordance with current tax laws.

The provision for income taxes consist of:

|                |  |                          |       |      |  |      |       |   |  |   |       |  
|--------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                |  | Years Ended December 31,
|                |  |                         
|                |  | 2001                     |       | 2002 |  | 2003
|                |  |                          |       |      |  |     
|CURRENT:        |  |                          |       |      |  |      |       |   |  |   |       |  
|Federal         |  | $                        | 539   |      |  | $    | 2,163 |   |  | $ | 2,202 |  
|State and local |  |                          | 184   |      |  |      | 342   |   |  |   | 16    |  
|Foreign         |  |                          | 692   |      |  |      | 822   |   |  |   | 1,166 |  
|                |  |                          |       |      |  |      |       |   |  |   |       |  
|                |  |                          | 1,415 |      |  |      | 3,327 |   |  |   | 3,384 |  
|                |  |                          |       |      |  |      |       |   |  |   |       |  
|DEFERRED:       |  |                          |       |      |  |      |       |   |  |   |       |  
|Federal         |  |                          | 982   |      |  |      | 485   |   |  |   | 980   |  
|State and Local |  |                          | 112   |      |  |      | 73    |   |  |   | 157   |  
|Foreign         |  |                          | 8     |      |  |      | (99   | ) |  |   | (418  | )
|                |  |                          |       |      |  |      |       |   |  |   |       |  
|                |  |                          | 1,102 |      |  |      | 459   |   |  |   | 719   |  
|                |  |                          |       |      |  |      |       |   |  |   |       |  
|                |  | $                        | 2,517 |      |  | $    | 3,786 |   |  | $ | 4,103 |  
|                |  |                          |       |      |  |      |       |   |  |   |       |  

Income taxes recorded by the Company differ from the amounts computed by
applying the statutory United States Federal income tax rate to income
before income taxes. The following schedule reconciles income tax expense
at the statutory rate and the actual income tax expense as reflected in the
accompanying consolidated statements of operations.

|                                                   |  |                          |       |      |  |      |       |  |  |   |       |  
|-------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | -
|                                                   |  | Years Ended December 31,
|                                                   |  |                         
|                                                   |  | 2001                     |       | 2002 |  | 2003
|                                                   |  |                          |       |      |  |     
|Tax at the Federal statutory rate                  |  | $                        | 2,449 |      |  | $    | 3,614 |  |  | $ | 4,146 |  
|State income taxes, net of the Federal tax benefit |  |                          | 240   |      |  |      | 141   |  |  |   | (5    | )
|Other                                              |  |                          | (172  | )    |  |      | 31    |  |  |   | (38   | )
|                                                   |  |                          |       |      |  |      |       |  |  |   |       |  
|                                                   |  | $                        | 2,517 |      |  | $    | 3,786 |  |  | $ | 4,103 |  
|                                                   |  |                          |       |      |  |      |       |  |  |   |       |  

Other reflects the effects of permanent differences such as amortization of
goodwill in 2001, tax free municipal interest income earned in 2001, 2002
and 2003, and the impact of foreign earnings which are taxed at different
rates. The effective rate decreased in 2003 to 34.0% of pre-tax income
from 36.0% in 2002. The decrease in the effective rate is primarily the
result of revised estimates of state income tax apportionment factors and
an increase in the relative mix of earnings being generated internationally
in countries that have more favorable tax rates.

The tax effects of the significant temporary differences giving rise to the
Companys deferred tax assets (liabilities) for the years ended December
31, 2002 and 2003 are as follows:

|                                |                   |   |       |       |      |   |       |       | 
|------------------------------- | ----------------- | - | ----- | ----- | ---- | - | ----- | ----- | 
|                                |                   |   | 2002  |       | 2003
|                                |                   |   |       |       |     
|Allowance for doubtful accounts |                   | $ | 752   |       |      | $ | 811   |      
|Inventory reserve               |                   |   | 500   |       |      |   | 43    |      
|Accrued expenses                |                   |   | 971   |       |      |   | 663   |      
|Other                           |                   |   | 815   |       |      |   | 786   |      
|                                |                   |   |       |       |      |   |       |      
|                                | Total current     |   |       | 3,038 |      |   |       | 2,303 | 
|                                |                   |   |       |       |      |   |       |      
|Goodwill and other intangibles  |                   |   | 511   |       |      |   | 518   |      
|Fixed assets                    |                   |   | 7     |       |      |   | 69    |      
|Long term liabilities           |                   |   |      |       |      |   | 1,979 |      
|Other                           |                   |   | 66    |       |      |   | 267   |      
|                                |                   |   |       |       |      |   |       |      
|                                | Total non-current |   |       | 584   |      |   |       | 2,833 | 
|                                |                   |   |       |       |      |   |       |      
|Total                           |                   | $ | 3,622 |       |      | $ | 5,136 |      
|                                |                   |   |       |       |      |   |       |      

A deferred U.S. tax liability has not been provided on the unremitted
earnings of Logistix because it is the intent of the Company to permanently
reinvest these earnings. Undistributed pre-tax earnings of Logistix, which
have been or are intended to be permanently invested in accordance with APB
No. 23, Accounting for Income Taxes  Special Areas, aggregated $2,222
and $4,713 at December 31, 2002 and 2003, respectively. The determination
of the tax liability upon repatriation is not practicable.

50



---



##### Table of Contents



10. COMMITMENTS AND CONTINGENCIES

Operating Leases
The Company has operating leases for its properties and equipment, which
expire at various dates through 2014.

Future minimum lease payments under non-cancelable operating leases are as
follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|Year       |  |   |        | 
|           |  |   |        | 
|2004       |  | $ | 3,954  | 
|2005       |  |   | 3,942  | 
|2006       |  |   | 3,913  | 
|2007       |  |   | 3,882  | 
|2008       |  |   | 3,518  | 
|Thereafter |  |   | 5,791  | 
|           |  |   |        | 
|Total      |  | $ | 25,000 | 
|           |  |   |        | 

Subsequent to December 31, 2003, the Company signed a new lease agreement
for the Paris office. The new lease agreement expires December 31, 2013
and provides for minimum annual payment of $96.

Aggregate rental expenses for operating leases were $1,783, $2,608 and
$3,529 for the years ended December 31, 2001, 2002 and 2003, respectively.

Guaranteed Royalties

For the years ended December 31, 2001, 2002, and 2003, the Company incurred
$3,691, $4,680 and $4,278, respectively, in royalty expense. License
agreements for certain copyrights and trademarks require minimum guaranteed
royalty payments over the respective terms of the licenses. As of December
31, 2003, the Company has committed to pay total minimum guaranteed
royalties as follows:

|      |  |   |       | 
|----- |  | - | ----- | 
|Year  |  |   |       | 
|      |  |   |       | 
|2004  |  | $ | 1,070 | 
|2005  |  |   | 2,020 | 
|2006  |  |   | 220   | 
|2007  |  |   | 330   | 
|      |  |   |       | 
|Total |  | $ | 3,640 | 
|      |  |   |       | 

Subsequent to December 31, 2003, the Company renewed its license agreement
for Scooby-Doo with Warner Bros. The new license agreement expires
December 31, 2007 and provides for guaranteed royalties in excess of $8,000
over the term. The guaranteed royalties are reflected in the table above.

Employment Agreement

The Company has employment agreements with key executives. Guaranteed
compensation under these agreements are as follows:

|      |  |   |       | 
|----- |  | - | ----- | 
|Year  |  |   |       | 
|      |  |   |       | 
|2004  |  | $ | 1,492 | 
|2005  |  |   | 265   | 
|      |  |   |       | 
|Total |  | $ | 1,757 | 
|      |  |   |       | 

Legal Proceedings

The Company is involved in various 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, results of operations or cash flows.

51



---



##### Table of Contents



11. INDUSTRY SEGMENTS, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

The Companys revenues are highly dependent on obtaining major contracts
from a limited number of customers. Approximately 66%, 65% and 58% of the
Companys consolidated revenues for the years ended December 31, 2001, 2002
and 2003, respectively, were from one customer in the marketing services
segment.

Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
The Company has identified two reportable segments through which it
conducts its continuing operations: marketing services and consumer
products. The factors for determining the reportable segments were based on
the distinct nature of their operations. They are managed as separate
business units because each requires and is responsible for executing a
unique business strategy. The marketing services segment designs
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 and provides
various services such as strategic planning and research, entertainment marketing, promotion,
event marketing, collaborative marketing, retail design and environmental branding. Marketing services programs are used for marketing purposes by
both the companies sponsoring the promotions and the licensors of the
entertainment properties on which the promotional programs are often based.
The consumer products segment designs and contracts for the manufacture of
toys and other consumer products for sale to major mass market and
specialty retailers, who in turn sell the products to consumers.

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

Certain information presented in the tables below has been reclassified to
conform to the current management structure as of January 1, 2003.
Specifically, the results and assets of the USI division, which had
previously been reported as part of Marketing Services, are now being
reported as part of Consumer Products, which is consistent with management
responsibility for this business. The majority of the revenues for the USI
division represent sales of made-to-order custom product to Oil & Gas and
other retailers who in turn sell the products to consumers. As a result of
the similarities between the USI business and the Consumer Products
business, the USI division was merged into the Consumer Products division
in connection with the Companys restructuring in 2002 (see Note 2).

52



---



##### Table of Contents



Industry Segments

|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|--------------------------------------------------------- |  | ---------------------------------------------- | ------- | -------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | 
|                                                          |  | As of and For the Year Ended December 31, 2001
|                                                          |  |                                               
|                                                          |  |                                                |         |          |  | Consumer  |        |       |  |   |         |   |  |  
|                                                          |  | Marketing Services                             |         | Products |  | Corporate |        | Total
|                                                          |  |                                                |         |          |  |           |        |      
|Total revenues                                            |  | $                                              | 104,335 |          |  | $         | 39,981 |       |  | $ |        |   |  | $ | 144,316 | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                              | 18,175  |          |  | $         | 3,275  |       |  | $ | (14,332 | ) |  | $ | 7,118   | 
|Provision (benefit) for income taxes                      |  |                                                | 6,431   |          |  |           | 1,158  |       |  |   | (5,072  | ) |  |   | 2,517   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Net income (loss)                                         |  | $                                              | 11,744  |          |  | $         | 2,117  |       |  | $ | (9,260  | ) |  | $ | 4,601   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Fixed asset additions, net                                |  | $                                              |        |          |  | $         |       |       |  | $ | 1,041   |   |  | $ | 1,041   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Depreciation and amortization                             |  | $                                              | 98      |          |  | $         | 782    |       |  | $ | 1,597   |   |  | $ | 2,477   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Total assets                                              |  | $                                              | 40,465  |          |  | $         | 19,189 |       |  | $ | 39,833  |   |  | $ | 99,487  | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 

|                                                                                                                   |  |   |                                                |  |          |   |           |   |       |   |         |   |  |   |         |  | 
|------------------------------------------------------------------------------------------------------------------ |  | - | ---------------------------------------------- |  | -------- | - | --------- | - | ----- | - | ------- | - |  | - | ------- |  | 
|                                                                                                                   |  |   | As of and For the Year Ended December 31, 2002
|                                                                                                                   |  |   |                                               
|                                                                                                                   |  |   |                                                |  |          |   | Consumer  |   |       |   |         |   |  |   |        
|                                                                                                                   |  |   | Marketing Services                             |  | Products |   | Corporate |   | Total
|                                                                                                                   |  |   |                                                |  |          |   |           |   |      
|Total revenues                                                                                                     |  | $ | 168,659                                        |  |          | $ | 38,173    |   |       | $ |        |   |  | $ | 206,832 | 
|Income (loss) before provision (benefit) for
income taxes and cumulative effect of change
in accounting principles |  | $ | 26,604                                         |  |          | $ | 1,903     |   |       | $ | (18,000 | ) |  | $ | 10,507  | 
|Provision (benefit) for income taxes                                                                               |  |   | 9,532                                          |  |          |   | 612       |   |       |   | (6,358  | ) |  |   | 3,786   | 
|                                                                                                                   |  |   |                                                |  |          |   |           |   |       |   |         |   |  |   |         |  | 
|Income (loss) before cumulative effect of change
in accounting principles                                          |  |   | 17,072                                         |  |          |   | 1,291     |   |       |   | (11,642 | ) |  |   | 6,721   | 
|Cumulative effect of change in
accounting principles, net of tax                                                   |  |   |                                               |  |          |   | 2,496     |   |       |   |        |   |  |   | 2,496   | 
|                                                                                                                   |  |   |                                                |  |          |   |           |   |       |   |         |   |  |   |         |  | 
|Net income (loss)                                                                                                  |  | $ | 17,072                                         |  |          | $ | (1,205    | ) |       | $ | (11,642 | ) |  | $ | 4,225   | 
|                                                                                                                   |  |   |                                                |  |          |   |           |   |       |   |         |   |  |   |         |  | 
|Fixed asset additions                                                                                              |  | $ |                                               |  |          | $ |          |   |       | $ | 982     |   |  | $ | 982     | 
|                                                                                                                   |  |   |                                                |  |          |   |           |   |       |   |         |   |  |   |         |  | 
|Depreciation and amortization                                                                                      |  | $ | 210                                            |  |          | $ | 66        |   |       | $ | 1,555   |   |  | $ | 1,831   | 
|                                                                                                                   |  |   |                                                |  |          |   |           |   |       |   |         |   |  |   |         |  | 
|Total assets                                                                                                       |  | $ | 52,212                                         |  |          | $ | 14,984    |   |       | $ | 66,058  |   |  | $ | 133,254 | 
|                                                                                                                   |  |   |                                                |  |          |   |           |   |       |   |         |   |  |   |         |  | 

|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|--------------------------------------------------------- |  | ---------------------------------------------- | ------- | -------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | 
|                                                          |  | As of and For the Year Ended December 31, 2003
|                                                          |  |                                               
|                                                          |  |                                                |         |          |  | Consumer  |        |       |  |   |         |   |  |  
|                                                          |  | Marketing Services                             |         | Products |  | Corporate |        | Total
|                                                          |  |                                                |         |          |  |           |        |      
|Total revenues                                            |  | $                                              | 183,687 |          |  | $         | 35,426 |       |  | $ |        |   |  | $ | 219,113 | 
|Income (loss) before provision (benefit) for
income taxes |  | $                                              | 25,774  |          |  | $         | 5,343  |       |  | $ | (19,065 | ) |  | $ | 12,052  | 
|Provision (benefit) for income taxes                      |  |                                                | 9,001   |          |  |           | 1,874  |       |  |   | (6,772  | ) |  |   | 4,103   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Net income (loss)                                         |  | $                                              | 16,773  |          |  | $         | 3,469  |       |  | $ | (12,293 | ) |  | $ | 7,949   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Fixed asset additions                                     |  | $                                              |        |          |  | $         |       |       |  | $ | 1,150   |   |  | $ | 1,150   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Depreciation and amortization                             |  | $                                              | 174     |          |  | $         | 128    |       |  | $ | 1,644   |   |  | $ | 1,946   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Total assets                                              |  | $                                              | 76,237  |          |  | $         | 18,748 |       |  | $ | 33,345  |   |  | $ | 128,330 | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 

53



---



##### Table of Contents



Information about the Companys operations by geographical area is as follows:

|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |         | 
|----------------------- | ------------- | ---------------------------- | - | ------------------------------------------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                        |               |                              |   | As of and For the Years Ended December 31,
|                        |               |                              |   |                                           
|                        |               |                              |   | 2001                                       |         | 2002 |   | 2003   
|                        |               |                              |   |                                            |         |      |   |        
|Revenues:               |               |                              |   |                                            |         |      |   |         |         |  |   |        
|                        | United States |                              | $ | 117,595                                    |         |      | $ | 160,364 |         |  | $ | 171,819 |        
|                        | International |                              |   | 26,721                                     |         |      |   | 46,468  |         |  |   | 47,294  |        
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|                        |               | Total revenues               |   | $                                          | 144,316 |      |   | $       | 206,832 |  |   | $       | 219,113 | 
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|Income from operations: |               |                              |   |                                            |         |      |   |         |         |  |   |        
|                        | United States |                              | $ | 4,997                                      |         |      | $ | 7,553   |         |  | $ | 8,195   |        
|                        | International |                              |   | 751                                        |         |      |   | 2,571   |         |  |   | 3,468   |        
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|                        |               | Total income from operations |   | $                                          | 5,748   |      |   | $       | 10,124  |  |   | $       | 11,663  | 
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|Fixed assets, net:      |               |                              |   |                                            |         |      |   |         |         |  |   |        
|                        | United States |                              | $ | 3,700                                      |         |      | $ | 3,747   |         |  | $ | 3,244   |        
|                        | International |                              |   | 478                                        |         |      |   | 438     |         |  |   | 565     |        
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|                        |               | Total fixed assets           |   | $                                          | 4,178   |      |   | $       | 4,185   |  |   | $       | 3,809   | 
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        

12. Related Party Transactions

On July 15, 2003, the Company entered into an agreement with U.S. Capital
Investors, Inc. (USCI), an entity controlled by Jeffrey S. Deutschman,
pursuant to which USCI will serve as an advisor to the Company with respect
to potential mergers and acquisitions through December 31, 2003. Mr.
Deutschman currently serves on the Board of Directors of the Company as the
representative of the holder of the Companys Series A Preferred Stock. The
Companys agreement with USCI provides for the payment of a discretionary
success fee for completed acquisition transactions in an amount determined
by an independent committee of the Board in accordance with certain
guidelines and criteria. The guidelines for fees payable upon successful
completion of an acquisition transaction are $200 for up to $10,000 of
consideration, 1.5% of consideration from $10,000 to $25,000 and 1% of
consideration over $25,000; provided, however, that the success fee for the
first transaction under the agreement has an initial fee guideline of $275
for up to $10,000 of consideration. Notwithstanding the guidelines, the
independent committee has absolute discretion in determining the amount, if
any, of the success fee for any transaction. The USCI agreement provides
for the payment of a refundable advance against success fees in the
aggregate amount of $275. The USCI agreement was approved by the Board and
consented to by the holder of the Series A Preferred Stock. The Company
believes that this agreement has enhanced its ability to analyze and close
merger and acquisition transactions in a manner that is more cost effective
than traditional outside advisory firms. In connection with the acquisition
of SCI (see Note 4), USCI earned a success fee of $275. This success fee is
recorded as a transaction cost of the SCI acquisition. The Company is
currently in discussions with USCI to continue the advisory related
services through 2004 which may or may not be on the same terms.

54



---



##### Table of Contents



13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

|                                            |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |           | 
|------------------------------------------- | ----------------------------------- | - | ------------------ | --------- | ------- | - | ------------ | --------- | ----------- | - | ------ | --------- |  | - | ------ | --------- | 
|                                            |                                     |   | Three Months Ended
|                                            |                                     |   |                   
|                                            |                                     |   | March 31           |           | June 30 |   | September 30 |           | December 31
|                                            |                                     |   |                    |           |         |   |              |           |            
|2002                                        |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|Revenues                                    |                                     | $ | 36,115             |           |         | $ | 47,151       |           |             | $ | 53,119 |           |  | $ | 70,447 |          
|Income from operations                      |                                     | $ | 857                |           |         | $ | 898          |           |             | $ | 3,152  |           |  | $ | 5,217  |          
|Net income available to
common stockholders |                                     | $ | (2,201             | )         |         | $ | 170          |           |             | $ | 1,756  |           |  | $ | 3,000  |          
|Basic income per share:                     |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|                                            | Income per share                    |   | $                  | (0.39     | )       |   | $            | 0.03      |             |   | $      | 0.31      |  |   | $      | 0.52      | 
|                                            | Weighted average shares
outstanding |   |                    | 5,708,343 |         |   |              | 5,695,293 |             |   |        | 5,740,001 |  |   |        | 5,743,525 | 
|Diluted income per share:                   |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|                                            | Income per share                    |   | $                  | (0.37     | )       |   | $            | 0.03      |             |   | $      | 0.28      |  |   | $      | 0.45      | 
|                                            | Weighted average shares
outstanding |   |                    | 5,884,044 |         |   |              | 5,928,828 |             |   |        | 7,582,285 |  |   |        | 7,554,530 | 

|                                            |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |           | 
|------------------------------------------- | ----------------------------------- | - | ------------------ | --------- | ------- | - | ------------ | --------- | ----------- | - | ------ | --------- |  | - | ------ | --------- | 
|                                            |                                     |   | Three Months Ended
|                                            |                                     |   |                   
|                                            |                                     |   | March 31           |           | June 30 |   | September 30 |           | December 31
|                                            |                                     |   |                    |           |         |   |              |           |            
|2003                                        |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|Revenues                                    |                                     | $ | 47,567             |           |         | $ | 56,953       |           |             | $ | 48,948 |           |  | $ | 65,645 |          
|Income from operations                      |                                     | $ | 1,394              |           |         | $ | 3,165        |           |             | $ | 1,748  |           |  | $ | 5,356  |          
|Net income available to
common stockholders |                                     | $ | 603                |           |         | $ | 1,765        |           |             | $ | 952    |           |  | $ | 3,129  |          
|Basic income per share:                     |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|                                            | Income per share                    |   | $                  | 0.11      |         |   | $            | 0.31      |             |   | $      | 0.17      |  |   | $      | 0.55      | 
|                                            | Weighted average shares
outstanding |   |                    | 5,708,279 |         |   |              | 5,700,016 |             |   |        | 5,750,736 |  |   |        | 5,715,160 | 
|Diluted income per share:                   |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|                                            | Income per share                    |   | $                  | 0.10      |         |   | $            | 0.28      |             |   | $      | 0.15      |  |   | $      | 0.45      | 
|                                            | Weighted average shares
outstanding |   |                    | 5,882,609 |         |   |              | 7,752,716 |             |   |        | 6,160,484 |  |   |        | 7,713,519 | 

14. SUBSEQUENT EVENTS (UNAUDITED)

On February 2, 2004 (effective January 31, 2004), the Company consummated the
acquisition of the assets of the promotional agency business of Johnson
Grossfield, Inc., a Minnesota corporation (JGI). Founded in 1987, JGIs
promotional business is principally focused on providing custom licensed
premiums for the kids marketing program of Subway Restaurants. JGI provides
approximately 50% of the creative and sourcing requirements for Subways kids
premium programs, and handles 100% of Subways logistics and fulfillment needs
for these programs. JGI has worked with Subway for 12 years and has built
strong relationships with the franchise organization.

The acquisition was consummated pursuant to an Asset Purchase Agreement dated
January 16, 2004, by and among the Company, Johnson Grossfield, Inc., a
Delaware corporation wholly owned by the Company, JGI, Marc Grossfield and Thom
Johnson (the Purchase Agreement). Under the terms of the Purchase Agreement,
the Company purchased the assets of JGIs promotional agency business for
approximately $4,600 in cash and 35,785 shares of the Companys common stock
(which, based upon the January 30, 2004 closing price of $14.80, had a value of
$530), plus additional earnout consideration of up to $4,500 based upon future
performance of the acquired business. The Company also assumed the operating
liabilities of the promotional agency business in connection with the
acquisition. The earnout consideration is based upon the business achieving
targeted levels of earnings before interest, taxes, depreciation and
amortization (EBITDA) over the period from 2004 through 2008. The earnout
payments, if required, are payable 50% in cash and 50% in shares of our common
stock. In connection with the acquisition of JGI, USCI earned a success fee of $125. This
success fee will be recorded as a transaction cost of the JGI acquisition.

On March 19, 2004, the Company entered into a Warrant Exchange Agreement with
Crown whereby Crown received new warrants to purchase an aggregate of 916,666
shares of Common Stock (New Warrants) in exchange for cancellation of the
existing Warrants to purchase shares of Series B Stock and Series C Stock
(which, upon issuance, would be convertible into 916,666 shares of Common
Stock)( see Note 8). The existing Warrants of Series B Stock and Series C
Stock would have expired in 2005. The New Warrants consist of warrants to
purchase 750,000 shares and 166,666 shares of Common Stock at exercise prices
of $16.00 and $18.00 per share, respectively. Of each tranch, 47.6% expire on
March 29, 2010 and 52.4% expire on June 20, 2010. As a result of the exchange

55



---



##### Table of Contents



transaction, Crown received an extension of time in which to exercise its right
to purchase additional equity in the Company, and the Company obtained an
elimination of the preferred rights and preferences associated with the now
eliminated Series B Stock and Series C Stock.. In determining that the warrant
exchange transaction was fair, from a financial point of view, the Companys
Board of Directors considered, among other things, a fairness opinion issued by
an independent financial advisory services firm.

Effective January 1, 2004, the Company entered into an employment agreement
with Kim Thomsen, the Companys President and Chief Creative Officer. The
employment agreement provides for: (i) her continued service to the Company
through December 31, 2007 (subject to her option to become a part-time
consultant during the last two years of the term), (ii) a long-term deferred
compensation arrangement in the form of a pension annuity which vests over four
years and provides for annual payments of $200 to Ms. Thomsen commencing in
2008 and ending in 2017, and (iii) the current surrender by Ms. Thomsen of 200,000 options at an
exercise price of $9.94 per share which fully vest on March 3, 2005 in exchange
for 100,000 options at an exercise price of 19.94 per share which fully vest on
March 3, 2005.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.




ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, as defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the
Exchange Act) , that are designed to ensure that information required to
be disclosed by the Company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules
and forms and that such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. The Company carried out an evaluation, under the
supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of December 31, 2003. Based on the
evaluation of these disclosure controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective

There were no changes in the Companys internal control over financial
reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act,
during the quarter ended December 31, 2003, that have materially affected,
or are reasonably likely to materially affect, the Companys internal
control over financial reporting.

56



---



##### Table of Contents






PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our Executive Officers required by Item 10 of Part III is
set forth in Item 1 of Part I Business-Executive Officers. Information
required by Item 10 of Part III regarding our Directors appears under the
caption ELECTION OF DIRECTORS in our Proxy Statement relating to our 2004
Annual Meeting of Stockholders, and is incorporated herein by reference.
Information relating to our Policy on Business Conduct and to our compliance
with Section 16(a) of the 1934 Act is also set forth in our Proxy Statement
relating to our 2004 Annual Meeting of Stockholders and is incorporated herein
by reference.




ITEM 11. EXECUTIVE COMPENSATION

Information relating to this item appears under the captions ELECTION OF
DIRECTORS, EXECUTIVE COMPENSATION AND RELATED MATTERS and REPORT OF THE
COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION in our Proxy Statement
relating to our 2004 Annual Meeting of Stockholders, which are incorporated
herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information relating to this item appears under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS in our Proxy Statement relating to our 2004 Annual
Meeting of Stockholders, which is incorporated herein by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to this item appears under the caption ELECTION OF
DIRECTORS in our Proxy Statement relating to our 2004 Annual Meeting of
Stockholders, which is incorporated herein by reference.




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information relating to this item appears under the caption PRINCIPAL
ACCOUNTING FEES AND SERVICES in our Proxy Statement relating to our 2004
Annual Meeting of Stockholders, which is incorporated herein by reference.

57



---



##### Table of Contents






PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



| | (a) |  | List of documents filed as part of this Report.
| | --- |  | -----------------------------------------------
|
| | 1.  |  | Financial Statements:                          

|                                                                                                                                 |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                 |  | Page
|                                                                                                                                 |  |     
|Report of Independent Auditors                                                                                                   |  |      | 28 | 
|Report of Independent Public Accountants                                                                                         |  |      | 29 | 
|CONSOLIDATED FINANCIAL STATEMENTS:                                                                                               |  |      |    | 
|Balance Sheets as of December 31, 2002 and 2003                                                                                  |  |      | 30 | 
|Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003                                                    |  |      | 31 | 
|Statements of Stockholders Equity and Mandatory Redeemable Preferred Stock for the Years Ended December 31, 2001, 2002 and 2003 |  |      | 32 | 
|Statements of Comprehensive Income for the Years Ended December 31, 2001, 2002 and 2003                                          |  |      | 33 | 
|Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003                                                    |  |      | 34 | 
|Notes to Consolidated Financial Statements                                                                                       |  |      | 35 | 
|2. Financial Statement Schedules:                                                                                                |  |      |    | 
|Report of Independent Auditors on Financial Statement Schedules                                                                  |  |      | 62 | 
|Report of Independent Public Accountants on Schedule II                                                                          |  |      | 63 | 
|Schedule II Valuation and Qualifying Accounts                                                                                    |  |      | 64 | 

| |  |       |  |                                                                                                                                                                    
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Note: |  | All other supplementary schedules are
omitted since they are not applicable or the required
information can be obtained from the consolidated
financial statements.



| | 3. |  | Exhibits:
| | -- |  | ---------

|     |  |                                                                                                                                                                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Asset Purchase Agreement by and among Equity Marketing, Inc.,
S.C.I. Promotional Group, LLC and Joseph J. Schmidt, III dated
September 3, 2003 (13).                                                                                                                                       
|3.1  |  | Certificate of Incorporation. (1)                                                                                                                                                                                                                                                          
|3.2  |  | Amended and Restated Bylaws. (3)                                                                                                                                                                                                                                                           
|3.3  |  | First Amendment to Amended and Restated Bylaws. (4)                                                                                                                                                                                                                                        
|3.4  |  | Certificate of Designation of Series A Senior Cumulative
Participating Convertible Preferred Stock, Series B Senior
Cumulative Participating Convertible Preferred Stock and Series C
Senior Cumulative Participating Convertible Preferred Stock of
the Company, dated March 29, 2000. (6)
|4.0  |  | Form of Warrant to Purchase Shares of Series B Senior Cumulative
Participating Convertible Preferred Stock, dated March 29, 2000.
(6)                                                                                                                                                      
|4.1  |  | Form of Warrant to Purchase Shares of Series C Senior Cumulative
Participating Convertible Preferred Stock, dated March 29, 2000.
(6)                                                                                                                                                      
|10.0 |  | Securities Purchase Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000.
(6)                                                                                                                                                         
|10.1 |  | Registration Rights Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000.
(6)                                                                                                                                                         
|10.2 |  | Agreement of Lease dated July 17, 1998 between Miracle Mile,
L.L.C. and Equity Marketing, Inc. (5)                                                                                                                                                                                         
|10.3 |  | Agreement of Lease, dated March 10, 2000, between Wide Harvest
Investment Ltd. and Equity Marketing Hong Kong, Ltd. (5)                                                                                                                                                                    
|10.4 |  | Credit Agreement by and between Bank of America, N.A. and Equity
Marketing, Inc., dated April 24, 2001. (7)                                                                                                                                                                                
|10.5 |  | First Amendment to Credit Agreement by and between Bank of
America, N.A. and Equity Marketing, Inc., dated September 30,
2001. (8)                                                                                                                                                         
|10.6 |  | Second Amendment to Credit Agreement by and between Bank of
America, N.A. and Equity Marketing, Inc., dated February 8, 2002.
(9)                                                                                                                                                          
|10.7 |  | Third Amendment to Credit Agreement by and between Bank of
America, N.A. and Equity Marketing, Inc., dated September 30,
2002. (10)                                                                                                                                                        
|10.8 |  | Fourth Amendment to Credit Agreement by and between Bank of
America, N.A. and Equity Marketing, Inc., dated September 30,
2003. *                                                                                                                                                          

58



---



##### Table of Contents



|                                                             |  |                                                                                                                                                                             
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Executive Compensation Plans and Arrangements of the Company
|                                                            
|10.9                                                         |  | Form of Directors and Officers Indemnification Agreement.*                                                                                                                
|10.10                                                        |  | Equity Marketing, Inc. Amended and Restated Stock Option Plan.
(3)                                                                                                          
|10.11                                                        |  | Equity Marketing Inc. Non-Employee Director Stock Option Plan.
(2)                                                                                                          
|10.12                                                        |  | Employment Agreement dated January 1, 2003 between Equity
Marketing, Inc. and Donald A. Kurz. (11)                                                                          
|10.13                                                        |  | Equity Marketing, Inc. Amended and Restated 2000 Stock Option
Plan. (12)                                                                                                    
|21.                                                          |  | Subsidiaries of the Registrant.*                                                                                                                                            
|23.                                                          |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                                                     
|31.1                                                         |  | Certification of Principal Executive Officer dated March 30, 2004
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                               
|31.2                                                         |  | Certification of Principal Financial Officer dated March 30, 2004
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                               
|32.1                                                         |  | Certification of Principal Executive Officer dated March 30, 2004
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
|32.2                                                         |  | Certification of Principal Financial Officer dated March 30, 2004
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*



---

|(1)  |  | Previously filed as an exhibit to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.       
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Previously filed as an exhibit to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference.       
|    
|    
|    
|    
|(3)  |  | Previously filed as an exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, and incorporated herein by
reference.
|    
|    
|    
|    
|(4)  |  | Previously filed as an exhibit to the
Registrants Current Report on Form 8-K dated April 16,
1999, and incorporated herein by reference.                       
|    
|    
|    
|    
|(5)  |  | Previously filed as an exhibit to the
Registrants Current Report on Form 8-K dated April 11,
2000, and incorporated herein by reference.                       
|    
|    
|    
|    
|(6)  |  | Previously filed as an exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, and incorporated herein by reference.    
|    
|    
|    
|    
|(7)  |  | Previously filed as an exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001, and incorporated herein by reference.    
|    
|    
|    
|    
|(8)  |  | Previously filed as an exhibit to the
Registrants Current Report on Form 8-K dated November 16,
2001, and incorporated herein by reference.                    
|    
|    
|    
|    
|(9)  |  | Previously filed as an exhibit to the
Registrants Current Report on Form 8-K dated March 18,
2002, and incorporated herein by reference.                       
|    
|    
|    
|    
|(10) |  | Previously filed as an exhibit to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference.       
|    
|    
|    
|    
|(11) |  | Previously filed as an exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003, and incorporated herein by reference.    
|    
|    
|    
|    
|(12) |  | Previously filed as an exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003, and incorporated herein by reference.     
|    
|    
|    
|    
|(13) |  | Previously filed as an exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, and incorporated herein by
reference.



---

(*) Filed herewith


59



---



##### Table of Contents





(b) Reports on Form 8-K

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

Report on Form 8-K filed with the Securities and Exchange Commission
on April 3, 2003 (Item 9). Report on Form 8-K filed with the Securities and Exchange Commission
on April 29, 2003 (Items 7 and 9). Report on Form 8-K filed with the Securities and Exchange Commission
on July 29, 2003 (Items 7 and 12). Report on Form 8-K filed with the Securities and Exchange Commission
on September 18, 2003 (Items 2 and 7). Report on Form 8-K filed with the Securities and Exchange Commission on
October 9, 2003 (Items 5 and 7). Report on Form 8-K filed with the Securities and Exchange Commission on
November 3, 2003 (Items 7 and 12). Report on Form 8-K/ A filed with the Securities and Exchange Commission on
November 12, 2003 (Item 7).


(c) Exhibits Required by Item 601 of Regulation S-K

See Item 3. above.

(d) Financial Statement Schedule

See Item 2. above.

60



---



##### Table of Contents






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 30TH DAY OF MARCH, 2004.

| |                                                                  |                   
| | ---------------------------------------------------------------- | ------------------
| | EQUITY MARKETING, INC.                                          
|
| | By:                                                              | /s/ Donald A. Kurz
| |                                                                 
| | Donald A. Kurz
Chairman of the Board and Chief Executive Officer

POWER OF ATTORNEY

We, the undersigned directors and officers of Equity Marketing, Inc. do
hereby severally constitute and appoint Donald A. Kurz, Teresa L. Tormey
and Zohar Ziv , and each of them, our true and lawful attorneys and agents,
to do any and all acts and things in our name and behalf in our capacities
as directors and officers and to execute any and all instruments for us and
in our names in the capacities indicated below, which said attorneys and
agents, or any of them, may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically, but without limitation, power and authority to sign for us or
any of us, in our names in the capacities indicated below, any and all
amendments hereto; and we do each hereby ratify and confirm all said
attorneys and agents, or any one of them, shall do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                                                   |  |                                                                                                |  |               
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|/s/ Donald A. Kurz

Donald A. Kurz                 |  | Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)                |  | March 30, 2004
|                                                  
|/s/ Zohar Ziv

Zohar Ziv                           |  | Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 30, 2004
|                                                  
|/s/ Howard D. Bland

Howard D. Bland               |  | Director                                                                                       |  | March 30, 2004
|                                                  
|/s/ Sanford R. Climan

Sanford R. Climan           |  | Director                                                                                       |  | March 30, 2004
|                                                  
|/s/ Jeffrey S. Deutschman

Jeffrey S. Deutschman   |  | Director                                                                                       |  | March 30, 2004
|                                                  
|/s/ Jonathan D. Kaufelt

Jonathan D. Kaufelt       |  | Director                                                                                       |  | March 30, 2004
|                                                  
|/s/ Alfred E. Osborne, Jr.

Alfred E. Osborne, Jr. |  | Director                                                                                       |  | March 30, 2004
|                                                  
|/s/ Bruce Raben

Bruce Raben                       |  | Director                                                                                       |  | March 30, 2004
|                                                  
|/s/ Stephen P. Robeck

Stephen P. Robeck           |  | Director                                                                                       |  | March 30, 2004

61



---



##### Table of Contents



Report of Independent Auditors onFinancial Statement Schedules

To the Board of Directorsof Equity Marketing, Inc.:

Our Audits of the consolidated financial statements referred to in our
report dated February 20, 2004 appearing in the 2003 Annual Report to Shareholders of Equity
Marketing, Inc. (which report and consolidated financial statements are incorporated by
reference in the Annual Report on Form 10-K) also included an audit of the financial statement
schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Los Angeles, California
February 20, 2004

62



---



##### Table of Contents



THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP
PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K.

Report of Independent Public Accountants

To Equity Marketing, Inc.:

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Equity
Marketing, Inc. and subsidiaries included in this Form 10-K and have issued
our report thereon dated February 27, 2002. Our audits were made for the
purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The schedule listed in the index in Item 14 is
the responsibility of the Companys management and is presented for
purposes of complying with the Securities and Exchange Commissions rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP

Los Angeles, California
February 27, 2002

63



---



##### Table of Contents

\

EQUITY MARKETING, INC.

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

|                             |                                                               |         |              |                    |            |          |            |            |     |             |            |       |  |  |      |        |      |  |     |       | 
|---------------------------- | ------------------------------------------------------------- | ------- | ------------ | ------------------ | ---------- | -------- | ---------- | ---------- | --- | ----------- | ---------- | ----- |  |  | ---- | ------ | ---- |  | --- | ----- | 
|                             |                                                               |         | Balance at   |                    | Additions  |          | Additions  |            |     |             |            |       |  |  |     
|                             |                                                               |         | Beginning of |                    | Charged to |          | Charged to |            | Net |             | Balance at
|CLASSIFICATION               |                                                               | of Year |              | Operating Expenses |            | Revenues |            | Deductions |     | End of Year
|                             |                                                               |         |              |                    |            |          |            |            |     |            
|Year Ended December 31, 2001 |                                                               |         |              |                    |            |          |            |            |     |             |            |       |  |  |      |        |      |  |     |      
|                             | Allowances for doubtful
accounts receivable
and sales returns |         | $            | 3,090              |            |          | $          | 336        |     |             | $          | 766   |  |  | $    | (1,856 | )(A) |  | $   | 2,336 | 
|Restructuring reserves       |                                                               |         | 195          |                    |            |          |           |            |     |             |           |       |  |  | (5   | )      |      |  | 190 |      
|Year Ended December 31, 2002 |                                                               |         |              |                    |            |          |            |            |     |             |            |       |  |  |      |        |      |  |     |      
|                             | Allowances for doubtful
accounts receivable
and sales returns |         | $            | 2,336              |            |          | $          | 484        |     |             | $          | 1,212 |  |  | $    | (1,999 | )(A) |  | $   | 2,033 | 
|Restructuring reserves       |                                                               |         | 190          |                    |            |          | 178        |            |     |             |           |       |  |  | (139 | )      |      |  | 229 |      
|Year Ended December 31, 2003 |                                                               |         |              |                    |            |          |            |            |     |             |            |       |  |  |      |        |      |  |     |      
|                             | Allowances for doubtful
accounts receivable
and sales returns |         | $            | 2,033              |            |          | $          | 277        |     |             | $          | 605   |  |  | $    | (772   | )(A) |  | $   | 2,143 | 
|Restructuring reserves       |                                                               |         | 229          |                    |            |          | 366        |            |     |             |           |       |  |  | (228 | )      |      |  | 367 |      



|(A) |  | Represents product returns, credits applied and accounts
receivable written off, net of recoveries.
|--- |  | ---------------------------------------------------------------------------------------------------

64