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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, 2002

OR

|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|[   ] |  | 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   [  ]

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]

Approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of the last business day
of the registrants most recently completed second fiscal quarter was
$40,889,050.

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 20, 2003  
|                               |  |                 
|Common Stock, $0.001 par value |  | 5,705,028       

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 22, 2003 are incorporated by reference into
Part III of this Form 10-K.





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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 THE 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 OPERATIONS          
|             | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    
|             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|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 AND RELATED STOCKHOLDER MATTERS
|             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|             | ITEM 14. CONTROLS AND PROCEDURES                                                                       
|PART IV     
|             | ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K                              
|SIGNATURES  
|EXHIBIT 10.7
|EXHIBIT 21  
|EXHIBIT 23  
|EXHIBIT 99.1
|EXHIBIT 99.2

EQUITY MARKETING, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2002

ITEMS IN FORM 10-K

|         |  |          |  |                                                                                                |  |      |    | 
|-------- |  | -------- |  | ---------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |          |  |                                                                                                |  | Page
|         |  |          |  |                                                                                                |  |     
|Part I   |  |          |  |                                                                                                |  |     
|         |  | Item 1.  |  | Business                                                                                       |  |      | 2  | 
|         |  | Item 2.  |  | Properties                                                                                     |  |      | 6  | 
|         |  | Item 3.  |  | Legal Proceedings                                                                              |  |      | 6  | 
|         |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  |      | 6  | 
|Part II  |  |          |  |                                                                                                |  |      |    | 
|         |  | Item 5.  |  | Market for the Registrants Common Equity and Related
Stockholder Matters                      |  |      | 7  | 
|         |  | Item 6.  |  | Selected Financial Data                                                                        |  |      | 8  | 
|         |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations          |  |      | 10 | 
|         |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  |      | 23 | 
|         |  | Item 8.  |  | Financial Statements and Supplementary Data                                                    |  |      | 23 | 
|         |  | Item 9.  |  | Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure           |  |      | 23 | 
|Part III |  |          |  |                                                                                                |  |      |    | 
|         |  | Item 10. |  | Directors and Executive Officers of the Registrant                                             |  |      | 24 | 
|         |  | Item 11. |  | Executive Compensation                                                                         |  |      | 26 | 
|         |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |  |      | 26 | 
|         |  | Item 13. |  | Certain Relationships and Related Transactions                                                 |  |      | 26 | 
|         |  | Item 14. |  | Controls and Procedures                                                                        |  |      | 26 | 
|Part IV  |  |          |  |                                                                                                |  |      |    | 
|         |  | Item 15. |  | Exhibits, Financial Statements, Schedule and Reports on Form 8-K                               |  |      | 27 | 

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 Operations
 Cautionary Statements and Risk Factors.

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PART I




ITEM 1.     BUSINESS

($000s omitted)

General

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

The Company believes its principal competitive advantages are its 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, access to a broad range of intellectual property
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.

On July 31, 2001, the Company acquired 100% of the common stock of
Logistix Limited, a United Kingdom corporation (Logistix). (See Note 4
of the accompanying Notes to Consolidated Financial Statements.) Logistix
is a leading marketing services agency which focuses primarily on
assisting consumer packaged goods companies in their efforts to market to
children between the ages of seven and fourteen by developing and
executing premium-based promotions and by providing marketing consulting
services. Logistix also derives a portion of its revenues from a consumer
products business which holds the licenses for various entertainment
properties. Logistix has been successfully integrated into the Companys
business and is making a positive contribution to the Companys revenues
and net income.

On July 17, 2002, the Company acquired the principal assets and assumed
the principal current liabilities of Promotional Marketing, L.L.C., d\b\a
UPSHOT, an Illinois limited liability company (UPSHOT). (See Note 4 of
the accompanying Notes to Consolidated Financial Statements.) UPSHOT is a
marketing agency with expertise in promotion, event, collaborative and
environmental marketing. The Company believes the acquisition of UPSHOT
will result in additional opportunities to provide a broader range of
services to existing clients and lead to a larger, more diverse client
base.

The Company is seeking to acquire other marketing services companies.

During 2002, the Company had two
operating segments: Marketing Services and Consumer Products. (See
Note 11 of the accompanying notes to the Consolidated Financial
Statements.)

Marketing Services

The Companys largest current
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 meals at
Burger King. The Company also produces products and provides related
marketing services for use in promotional programs run by its clients.
Premium-based promotions are used for marketing purposes by both the
companies sponsoring the promotions,
typically the Companys 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 restaurants and other
retail outlets supplements the marketing of motion pictures and television
programs by the studios.

The Companys promotional programs are often based upon characters from
entertainment properties licensed by television and motion picture studios
and others. Licenses for characters upon which the Companys programs are
based are generally obtained directly by the Companys clients (often with
the Companys assistance) from licensors, including Warner Bros. Consumer
Products (Warner Bros.), Universal Studios (Universal), Nickelodeon,
a division of MTV Networks, a division of Viacom, DreamWorks SKG, The Walt
Disney Company, Sony Pictures Entertainment and Twentieth Century Fox.
Such licenses are typically specific to

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the promotional campaign implemented by the Companys clients and generally do not extend beyond
the end of the promotional campaign. In contrast, the Companys Consumer
Products division generally obtains licenses directly from licensors.
These licenses generally grant the Company rights to design, manufacture
and distribute certain specific items or types of items in specific United
States and/or international markets for defined terms, typically one to
three years.

The Company performs a wide range of creative, design, development,
production and fulfillment services for its clients. The Company assists
clients with promotional strategy, calendar planning, and concept
development; provides an initial evaluation of intellectual properties for
which licenses are available; advises clients as to which licenses are
consistent with their marketing objectives; and often assists clients in
procuring such licenses. The Company also proposes specific product and
non-product based promotions utilizing the properties secured by its
clients; develops promotional concepts and designs based on the property;
provides the development and engineering necessary to translate the
property, which often consists of two-dimensional artwork, into finished
products; obtains or coordinates licensor approval of product designs,
prototypes and finished products; contracts for and supervises the
manufacture of products; arranges for safety testing to customer and
regulatory specifications by an independent testing laboratory; and
arranges insurance, customs clearance and, in most instances, the shipping
of finished products to the client. In some instances, the Company also
provides warehousing, fulfillment and billing services. The Company also
provides creative services as needed to clients for packaging and
point-of-sale advertising. In some cases, customers obtain license rights
or develop promotions concepts independently and engage the Company only
to design and produce specific products. In most cases, the Company
provides the full range of its services.

The Companys international
promotions often include unique products and
programs tailored to local markets and 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 the Company has already made its
investment in the creative development of concepts based upon such
entertainment properties by the time of their domestic release, it often
has completed both creative, and in some instances, production work in
advance of their foreign release. The Company pursues promotions
opportunities worldwide. In 2002, the Company sold promotional products
internationally in Canada, Europe, Asia, Australia, South Africa, and throughout Latin
America. The Companys two largest international promotions clients
are Burger King and The Kellogg Company. The Kellogg business is
managed by Logistix. During 2002, Logistix sold promotional products
to The Kellogg Company in Europe, the United States, Australia and
South Africa.

The Companys 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 product-based. The Company also intends to continue to
diversify its marketing services client base and to continue to expand its
relationship with Burger King. In connection with these strategic goals,
the Company acquired Logistix in July 2001, thereby gaining a presence in
Europe with broad-based strategic client relationships, including
research, new product development, licensing guidance and the development
of premium-based promotions; and the Company acquired UPSHOT in July 2002,
gaining a marketing agency with expertise in promotion, event,
collaborative and environmental marketing. (See Note 4 of the
accompanying Notes to Consolidated Financial Statements.)

Marketing Services revenues for the years ended December 31, 2000, 2001
and 2002 were $208,607, $117,305 and $175,372 or 90%, 81% and 85% of the
Companys revenues, respectively. A single client, Burger King, accounted
for approximately 80%, 66% and 65% of the Companys total revenues for the
years ended December 31, 2000, 2001 and 2002, respectively. In
December 2002, Burger King announced that the Company will retain its
role as Burger Kings primary creative and manufacturing agency
of record for Burger Kings worldwide premium programs. (See
Managements Discussion and Analysis of Financial Condition and Results
of OperationsCautionary Statements and Risk Factors).

Consumer Products

The Companys Consumer Products division designs and manufactures toys and
other consumer products for sale to major mass market retailers such as
Toys R Us, Wal-Mart and Target, specialty market retailers such as
Spencer Gifts, Inc. and Blockbuster and to various international
distributors worldwide. These products incorporate trademarks the Company
owns or licenses of classic, time-tested properties the Company has
obtained from entertainment companies. In some cases, the products are
based on the same licensed properties that are used by the Companys
Marketing Services division.

In June 1998, the Company obtained a three-year licensing agreement with
Warner Bros. to design, manufacture, market and distribute toys based on
characters from Scooby-Doo,one of the longest-running childrens cartoon
shows in television history. In September 2000, the Company renewed its
licensing agreement with Warner Bros. through the end of 2003. In 2001,
the Company elected to exercise its option to design, manufacture, market
and distribute toys in the United States and Canada based on the
live-action Scooby-Doo feature film which was released by Warner Bros.
Pictures in Summer 2002. Also in 2001, the Company executed a separate
agreement with Warner Bros. granting to the Company manufacturing and
distribution rights for Scooby-Dootoys in Europe and Latin America. The
Company is currently in negotiations with Warner Bros. for another
multi-year extension of its Scooby-Doolicensing agreement covering
domestic and international manufacturing and distribution rights.

In July 1998, the Company acquired the worldwide rights to manufacture,
market and distribute Tub Tints®, a childrens bath product consisting of
effervescent colored tablets which dissolve in the bath. Depending on
which color tablets are mixed, a wide

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variety of colors can be created.
In 2002, the Company ceased marketing products under the Tub Tints® brand,
but did incorporate effervescent water coloring tablets into the Companys
new Crayola®-branded line of bath toys (see below).

In January 2000, Logistix obtained a
three year license agreement from BBC Worldwide (BBCW) for the
BBC television program Robot Wars® to design, manufacture, market and distribute
toys based on the Robots appearing in
the show including pullback toys, radio control toys and playsets. In 2001, a
second agreement was made with BBCW for a three year license
agreement that covers die cast
toys based on Robot Wars®. Robot Wars®, a battling robot based show, has been running on BBC since 1998 and
has continued to be one of their top performing shows. These rights extended to the UK and
Ireland and mass market retailers. Logistix is currently in negotiations
with BBCW to renew these two agreements for a further three year period.

In January 2002, Logistix entered into
a four year license agreement with BBCW to
design, manufacture, market and distribute plastic toys and playsets based on the BBC property Ace Lightning. This
agreement covers the UK and Ireland general markets. Logistix also has exclusive
manufacturing rights in Europe.

In January 2002, Logistix entered into an agreement with BKN Consumer products to
design, manufacture, market and distribute plastic figurines and playsets based on characters from their animation
based show, Ultimate Book of Spells. This agreement includes both the
UK and Ireland mass markets,
and includes some manufacturing rights for other territories.

In January 2002, the Company obtained a three-year licensing agreement
with MGM to design, manufacture, market and distribute toys based on
characters from The Pink Panther. Under terms of the agreement, Equity
Marketing has the right to design and produce Pink Panther plush items for distribution
to mass and specialty markets in the United States and Canada.

In May 2002, the Company entered into a three year licensing agreement with
Binney & Smith, the maker of Crayola® products. The Company designs and
produces a full line of Crayola®-branded bath toys, bath activities and bath
art sets for distribution to mass and specialty markets. Incorporated into
this line are Crayola®-branded versions of the effervescent water coloring
tablets which were previously marketed under the Tub Tints® brand. The first
products developed under this agreement were distributed in Fall 2002. Binney
& Smith, which will celebrate the centennial of the Crayola® crayon in 2003, is
the worlds leading producer of childrens art products.

In September 2002, the Company entered into a three year licensing agreement
with Disney Consumer Products, under which the Company will produce and market
toys and novelty merchandise based on Disneys Kim Possible. The agreement
covers the United States and Canada. Kim Possible, an original animated
comedy-adventure series, debuted in June 2002 on the Disney Channel as the
highest rated premier ever for an original Disney Channel series. Kim Possible
also began airing Saturday mornings on ABC Kids in September 2002. The Kim
Possibleline will include fashion dolls, mini-dolls, novelties and plush items
for the mass and specialty markets. The first products are expected to be
available to consumers in Summer 2003.

In November 2002, the Company entered into a three year licensing agreement
with The Jim Henson Company to be the worldwide plush master toy licensee for
the Emmy Award-winning preschool series, Jim Hensons Bear in the Big Blue
House. The agreement covers the United States and Canada. The Company will
design and produce a line of branded plush, figures and toy novelties for
distribution to mass and specialty markets. The first products developed under
this agreement will be available in both domestic and international markets
starting Fall 2003.

In February 2003, the Company entered into a three year agreement that names
Equity Marketing the master toy licensee for Cartoon Networks The Powerpuff
Girls and Samurai Jack. The agreement covers the United States and
Canada and includes numerous toy categories such as plush, figures, play sets,
hard and soft goods, etc. The Emmy® Award-winning The Powerpuff Girlsseries
is Cartoon Networks #1 original series with girls 2-11. Samurai Jackdebuted
on Cartoon Network on August 10, 2001 with over 32 million people from ages two
and older tuning in since its premiere. The first products developed under
this agreement are expected to be distributed in Fall 2003.

In February 2003, the Company entered into a three year agreement that names
Equity Marketing the master toy licensee for Baby Einstein Infant/Preschool
and Plush toys. The agreement covers North America and the first products
developed under this agreement are expected to be available by Spring 2004.
The Baby Einstein Company, LLC is an award-winning creator of developmental
media products and best selling brand of videos specifically created for babies
and toddlers. The Baby Einstein Company is a subsidiary of The Walt Disney
Company.

The principal strategy of the Companys Consumer Products division is to
focus on distinctive, niche products that complement the Companys
promotions business and uses the same design, production and logistics
infrastructure. These products are primarily based on classic,
time-tested licensed properties that are likely to produce revenue for
several years, thus increasing the predictability of the Companys
revenues. The Company currently intends to implement this strategy
principally through internal growth. No assurance can be given that the
Company will be successful in obtaining or renewing licenses under
satisfactory terms.

The Consumer Products divisions revenues were $23,680, $27,011 and
$31,460, or 10%, 19% and 15% of the Companys total revenues, for the
years ended December 31, 2000, 2001 and 2002, respectively.

Backlog

Order backlog at March 19, 2002 and March 19, 2003 was approximately
$106,150 and $142,000, respectively. The Company expects the 2003 order
backlog to be filled by December 31, 2003.

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Manufacturing

The Companys products are manufactured according to Company and customer
specifications by unaffiliated contract manufacturers. Equity Marketing
Hong Kong, Ltd., a wholly owned subsidiary of the Company (Equity
Marketing HK), 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.
The Company believes 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. The Companys products are also manufactured by third parties
in the United States. Equity Marketing generally retains, for itself or on
behalf of its customers, ownership of the molds and tooling required for
the manufacture of its products. The Company is not a party to any
long-term contractual arrangements with any manufacturer. During 2002,
approximately 96% of the Companys 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 costs for the Company. There can be no
assurance that the Company would be able to source product for the US
market from a country other than China without significantly increasing
its product cost. (See Cautionary Statements and Risk Factors.)

Virtually all of the raw materials used in the Companys products are available to its contract
manufacturers from numerous suppliers. The manufacturers do not have
long-term supply contracts in place with their raw materials suppliers.
Accordingly, the Company is subject to variations in the prices it pays to
its 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 the Company may not be able to fully
pass on to its customers. Any such increase could negatively impact the
Companys business, financial condition or results of operations.

Trademarks and Copyrights

The Company does not own trademarks or copyrights on properties on which
most of its current products are based. These rights are typically 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

The domestic and international marketing services and consumer products
businesses are highly competitive.

In its core domestic marketing services business, Equity Marketing
competes with several other companies. Competitors include subsidiaries
of The Interpublic Group of Companies (including Draft Worldwide, The
Zipatoni Company and Marketing Drive Worldwide), Frankel (a subsidy of
Publicis), 141 Communicator, Marketing Store Worldwide, Creata Promotion,
Momentum and Wunderman. Competition in the international promotions
industry includes local companies in each market and a small number of
emerging international promotions companies.

The Companys consumer products competitors include companies which have
far more extensive sales and development staffs and significantly greater
financial resources than does the Company. There can be no assurance that
the Company will be able to compete effectively against such companies in
the future. The Company expects that in 2003 the principal competitors to
the Companys consumer products business will be 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 the Company.

The Company believes the principal competitive factors affecting its
business are development of client marketing and promotional strategy,
unique consumer insight, creative execution, license selection, price,
product and service quality and safety and speed of production.

Government Regulation

In the United States, the Company is subject to the provisions of, among
other laws, the Federal Consumer Product Safety Act and the Federal
Hazardous Substances Act (the Acts). The Acts empower the Consumer
Product Safety Commission (the CPSC) to protect the public against
unreasonable risks of injury associated with promotional and consumer
products, including toys and other articles. The CPSC 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 CPSC 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. The Company
performs quality control procedures (including the inspection of goods at
factories and the retention of independent testing laboratories) to ensure
compliance with applicable laws.

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Notwithstanding the foregoing, there can
be no assurance that all of the Companys products are or will be
hazard-free. Any material product recall could have a material adverse
effect on the Companys results of operations and financial condition and
could also negatively affect the Companys reputation and the sales of its
other products. (See Managements Discussion and Analysis of Financial
Condition and Results of Operations.)

Employees

As of December 31, 2002, Equity Marketing employed a total of 308
individuals, including 212 individuals located in the United States, 47
individuals located in Europe and 49 individuals employed by and located
at Equity Marketing HK. In addition, the Company utilizes, on an ongoing
basis, the services of freelance artists and other temporary staff.
Equity Marketing believes it maintains satisfactory relations with its
employees.

Available Information

The Companys website address is www.equity-marketing.com. The Company
makes available, free of charge, on or through the Companys website its
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.




ITEM 2.     PROPERTIES

On January 4, 1999, Equity Marketing occupied its corporate offices and
studio facilities consisting of approximately 57,000 square feet of leased space in
Los Angeles, California. The lease expires December 31, 2009. Equity
Marketing occupies a warehouse in Indianapolis, Indiana of approximately
40,000 square feet of leased space under a lease which expires May 31,
2005. Equity Marketing HK occupies approximately 6,000
square feet of leased space in Hong Kong, under a lease which expires
August 31, 2004. Logistix occupies approximately 3,800 square feet of
leased space in Gerrards Cross outside of London under a lease that
expires September 19, 2011 and approximately 1,938 square feet of leased
space in Paris under a lease that expires January 2, 2004. UPSHOT
occupies approximately 60,494 square feet of leased space in Chicago,
Illinois under a lease that expires March 31, 2009 and leases
approximately 12,073 square feet of leased space in Richmond, Virginia
under a lease that expires April 30, 2007. The Richmond, Virginia space
was vacated by UPSHOT in connection with a restructuring plan (see
Managements Discussion and Analysis of Financial Condition and Results
of OperationsRestructuring). The Company is currently seeking a
subtenant for the Richmond, Virginia facility.




ITEM 3.     LEGAL PROCEEDINGS

The Perper Matter

On February 1, 2002, Alan Perper filed a complaint (No. BC 267 408)
against the Company, Donald A. Kurz (Chairman of the Board and Chief
Executive Officer of the Company) and Gaetano Mastropasqua (President, New
Business and Client Services, of the Company) in the Superior Court of the
State of California, County of Los Angeles. The plaintiff is a former
employee of the Company who was terminated in November 2001. The
complaint alleged that the plaintiff was wrongfully terminated and sought
compensatory damages plus punitive damages, interest and attorneys fees.
Pursuant to indemnification agreements between the Company and each of
Messrs. Kurz and Mastropasqua, the Company was obligated to defend and
indemnify them in this matter. The matter was settled through mediation
in December 2002. The amount of the settlement was not significant.

General Litigation

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




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

None.

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PART II




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

The Companys Common Stock is traded on The Nasdaq Stock Market under the
symbol EMAK. On March 20, 2003 there were approximately 1,070 beneficial
holders of the Companys Common Stock.

The Company currently has no plans to pay dividends on its Common Stock.
The Company intends to retain all earnings for use in its business. Under
the Companys current credit facility, the Company cannot pay dividends on
its Common Stock without the prior consent of the lenders. (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
|               |  |                            
|               |  | 2001                        |       | 2002
|               |  |                             |       |     
|               |  | High                        |       | Low  |  | High |       | Low
|               |  |                             |       |      |  |      |       |    
|First Quarter  |  |                             | 14.00 |      |  |      | 8.50  |     |  |  | 15.00 |  |  |  | 11.50 | 
|Second Quarter |  |                             | 11.50 |      |  |      | 7.75  |     |  |  | 14.55 |  |  |  | 11.69 | 
|Third Quarter  |  |                             | 13.75 |      |  |      | 10.27 |     |  |  | 13.99 |  |  |  | 10.70 | 
|Fourth Quarter |  |                             | 13.39 |      |  |      | 10.80 |     |  |  | 13.49 |  |  |  | 10.16 | 

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ITEM 6.    SELECTED FINANCIAL DATA

The selected consolidated financial data presented below have been derived
from the Company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,                                                                                  |                                                                                     | 1998                                                                                                     |           | 1999   |        | 2000 |           | 2001   |        | 2002
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |     
|Consolidated Statements of Operations and Per Share Data: (in thousands, except share and per share data) |                                                                                     |                                                                                                          |           |       
|Revenues                                                                                                  |                                                                                     | $                                                                                                        | 159,136   |        |        | $    | 227,063   |        |        | $    | 232,287   |        |        | $ | 144,316   |        |        | $ | 206,832   |       
|Cost of sales                                                                                             |                                                                                     |                                                                                                          | 112,153   |        |        |      | 170,416   |        |        |      | 172,270   |        |        |   | 104,129   |        |        |   | 151,307   |       
|Provision for production-in-process losses                                                                |                                                                                     |                                                                                                          | 2,666     |        |        |      |          |        |        |      |          |        |        |   |          |        |        |   |          |       
|Forgiveness of note receivable                                                                            |                                                                                     |                                                                                                          |          |        |        |      |          |        |        |      |          |        |        |   |          |        |        |   | 1,685     |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          | Gross profit                                                                        |                                                                                                          |           | 44,317 |        |      |           | 56,647 |        |      |           | 60,017 |        |   |           | 40,187 |        |   |           | 53,840 |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Operating expenses:                                                                                       |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          |                                                                                     | Salaries, wages and benefits                                                                             |           |        | 14,550 |      |           |        | 17,350 |      |           |        | 17,610 |   |           |        | 15,924 |   |           |        | 20,662 | 
|                                                                                                          |                                                                                     | Selling, general and administrative                                                                      |           |        | 22,127 |      |           |        | 22,829 |      |           |        | 23,075 |   |           |        | 18,323 |   |           |        | 22,423 | 
|                                                                                                          |                                                                                     | AmeriServe bankruptcy bad debt expense                                                                   |           |        |       |      |           |        | 1,014  |      |           |        | 482    |   |           |        |       |   |           |        |       | 
|                                                                                                          |                                                                                     | Impairment of assets                                                                                     |           |        | 6,712  |      |           |        |       |      |           |        | 8,504  |   |           |        |       |   |           |        |       | 
|                                                                                                          |                                                                                     | Business process reengineering                                                                           |           |        | 2,220  |      |           |        |       |      |           |        |       |   |           |        |       |   |           |        |       | 
|                                                                                                          |                                                                                     | Integration costs                                                                                        |           |        |       |      |           |        |       |      |           |        |       |   |           |        | 192    |   |           |        | 453    | 
|                                                                                                          |                                                                                     | Restructuring loss (gain)                                                                                |           |        | 4,121  |      |           |        | (604   | )    |           |        | (418   | ) |           |        |       |   |           |        | 178    | 
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          |                                                                                     | Total operating expenses                                                                                 |           |        | 49,730 |      |           |        | 40,589 |      |           |        | 49,253 |   |           |        | 34,439 |   |           |        | 43,716 | 
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          |                                                                                     | Income (loss) from operations                                                                            |           |        | (5,413 | )    |           |        | 16,058 |      |           |        | 10,764 |   |           |        | 5,748  |   |           |        | 10,124 | 
|Other income (expense), net                                                                               |                                                                                     |                                                                                                          | (511      | )      |        |      | (510      | )      |        |      | 1,375     |        |        |   | 1,370     |        |        |   | 383       |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          |                                                                                     | Income (loss) before provision for
income taxes and cumulative effect
of change in accounting principles |           |        | (5,924 | )    |           |        | 15,548 |      |           |        | 12,139 |   |           |        | 7,118  |   |           |        | 10,507 | 
|Provision for income taxes                                                                                |                                                                                     |                                                                                                          | 69        |        |        |      | 6,134     |        |        |      | 6,797     |        |        |   | 2,517     |        |        |   | 3,786     |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          |                                                                                     | Income (loss) before cumulative effect
of change in accounting principles                                |           |        | (5,993 | )    |           |        | 9,414  |      |           |        | 5,342  |   |           |        | 4,601  |   |           |        | 6,721  | 
|Cumulative effect of change in accounting
principles, net of tax                                          |                                                                                     |                                                                                                          |          |        |        |      |          |        |        |      |          |        |        |   |          |        |        |   | (2,496    | )     
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          |                                                                                     | Net income (loss)                                                                                        |           |        | (5,993 | )    |           |        | 9,414  |      |           |        | 5,342  |   |           |        | 4,601  |   |           |        | 4,225  | 
|Preferred stock dividends                                                                                 |                                                                                     |                                                                                                          |          |        |        |      |          |        |        |      | 956       |        |        |   | 1,500     |        |        |   | 1,500     |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Net income (loss) available to common
stockholders                                                        |                                                                                     | $                                                                                                        | (5,993    | )      |        | $    | 9,414     |        |        | $    | 4,386     |        |        | $ | 3,101     |        |        | $ | 2,725     |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Basic income (loss) per share:                                                                            |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          | Income (loss) per share
before cumulative effect of
change in accounting principles |                                                                                                          | $         | (0.98  | )      |      | $         | 1.51   |        |      | $         | 0.70   |        |   | $         | 0.52   |        |   | $         | 0.91   |       
|                                                                                                          | Cumulative effect of change in accounting
principles, net of tax                    |                                                                                                          |           |       |        |      |           |       |        |      |           |       |        |   |           |       |        |   |           | (0.44  | )     
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          | Income (loss) per share                                                             |                                                                                                          | $         | (0.98  | )      |      | $         | 1.51   |        |      | $         | 0.70   |        |   | $         | 0.52   |        |   | $         | 0.48   |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Basic weighted average shares
outstanding                                                                 |                                                                                     |                                                                                                          | 6,089,618 |        |        |      | 6,227,842 |        |        |      | 6,275,590 |        |        |   | 5,996,662 |        |        |   | 5,721,790 |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Diluted income (loss) per share:                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          | Income (loss) per share
before cumulative effect of
change in accounting principles |                                                                                                          | $         | (0.98  | )      |      | $         | 1.46   |        |      | $         | 0.68   |        |   | $         | 0.50   |        |   | $         | 0.89   |       
|                                                                                                          | Cumulative effect of change in accounting
principles, net of tax                    |                                                                                                          |           |       |        |      |           |       |        |      |           |       |        |   |           |       |        |   |           | (0.33  | )     
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                          | Income (loss) per share                                                             |                                                                                                          | $         | (0.98  | )      |      | $         | 1.46   |        |      | $         | 0.68   |        |   | $         | 0.50   |        |   | $         | 0.56   |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Diluted weighted average shares
outstanding                                                               |                                                                                     |                                                                                                          | 6,089,618 |        |        |      | 6,440,738 |        |        |      | 6,460,557 |        |        |   | 6,164,154 |        |        |   | 7,590,018 |       
|                                                                                                          |                                                                                     |                                                                                                          |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       

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|                                                |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |         | 
|----------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------- | 
|As of December 31,                              |  | 1998 |         | 1999 |  | 2000 |        | 2001 |  | 2002
|                                                |  |      |         |      |  |      |        |      |  |     
|Consolidated Balance Sheet Data: (in thousands) |  |      |         |      |  |      |        |      |  |      |         |  |  |   |        | 
|Working capital                                 |  | $    | 4,268   |      |  | $    | 11,045 |      |  | $    | 52,140  |  |  | $ | 36,620 |  |  | $ | 29,157  | 
|Total assets                                    |  | $    | 115,480 |      |  | $    | 97,244 |      |  | $    | 110,542 |  |  | $ | 99,487 |  |  | $ | 133,254 | 
|Long-term debt                                  |  | $    |        |      |  | $    |       |      |  | $    |        |  |  | $ |       |  |  | $ |        | 
|Stockholders equity                            |  | $    | 32,407  |      |  | $    | 42,025 |      |  | $    | 45,241  |  |  | $ | 42,473 |  |  | $ | 45,946  | 

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

Results of Operations

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,                                         |                                                                                                   | 2000 |       | 2001 |    | 2002
|                                                                 |                                                                                                   |      |       |      |    |     
|Revenues                                                         |                                                                                                   |      | 100.0 | %    |    |      | 100.0 | %    |   |  | 100.0 | %   
|Cost of sales                                                    |                                                                                                   |      | 74.2  | %    |    |      | 72.2  | %    |   |  | 73.2  | %   
|Forgiveness of note receivable                                   |                                                                                                   |      |      | %    |    |      |      | %    |   |  | 0.8   | %   
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |     
|Gross profit                                                     |                                                                                                   |      | 25.8  | %    |    |      | 27.8  | %    |   |  | 26.0  | %   
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |     
|Operating expenses:                                              |                                                                                                   |      |       |      |    |      |       |      |   |  |       |     
|                                                                 | Salaries, wages and benefits                                                                      |      |       | 7.6  | %  |      |       | 11.0 | % |  |       | 10.0 | %
|                                                                 | Selling, general and administrative                                                               |      |       | 9.9  | %  |      |       | 12.7 | % |  |       | 10.8 | %
|                                                                 | AmeriServe bankruptcy bad debt expense                                                            |      |       | 0.2  | %  |      |       |     | % |  |       |     | %
|                                                                 | Impairment of assets                                                                              |      |       | 3.7  | %  |      |       |     | % |  |       |     | %
|                                                                 | Integration costs                                                                                 |      |       |     | %  |      |       | 0.1  | % |  |       | 0.2  | %
|                                                                 | Restructuring loss (gain)                                                                         |      |       | (0.2 | )% |      |       |     | % |  |       | 0.1  | %
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |     
|                                                                 | Total operating expenses                                                                          |      |       | 21.2 | %  |      |       | 23.8 | % |  |       | 21.1 | %
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |     
|                                                                 | Income from operations                                                                            |      |       | 4.6  | %  |      |       | 4.0  | % |  |       | 4.9  | %
|Other income (expense), net                                      |                                                                                                   |      | 0.6   | %    |    |      | 0.9   | %    |   |  | 0.2   | %   
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |      |  
|                                                                 | Income before provision for
income taxes and cumulative effect of change in accounting principles |      |       | 5.2  | %  |      |       | 4.9  | % |  |       | 5.1  | %
|Provision for income taxes                                       |                                                                                                   |      | 2.9   | %    |    |      | 1.7   | %    |   |  | 1.9   | %   
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |      |  
|                                                                 | Income before cumulative effect of
change in accounting principles                                |      |       | 2.3  | %  |      |       | 3.2  | % |  |       | 3.2  | %
|Cumulative effect of change in
accounting principles, net of tax |                                                                                                   |      |      | %    |    |      |      | %    |   |  | (1.2  | )%  
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |      |  
|                                                                 | Net income                                                                                        |      |       | 2.3  | %  |      |       | 3.2  | % |  |       | 2.0  | %
|                                                                 |                                                                                                   |      |       |      |    |      |       |      |   |  |       |      |  

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

Revenues in 2002 increased $62,516, or 43.3%, to $206,832 from $144,316 in
2001. Marketing services revenues increased $58,067, or 49.5%, to
$175,372 from $117,305 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. Consumer products revenues increased $4,449,
or 16.5%, to $31,460 from $27,011 in 2001. This increase is primarily due
to increased sales of Robot Wars® product generated by Logistix. The
revenue increase was also partially attributable to increased revenues
from Scooby-Doo product internationally, and was partially offset by
decreased sales of Tub Tints® product. 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, 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 the Companys full year 2002 revenue expectations, due to
delayed shipments of both custom promotional products and consumer
products, and altered production schedules in the Companys overseas
facilities. The Companys estimate of this impact is approximately $8.0
million of revenues. A portion of the revenue impacted by the port dispute that the
Company previously expected to recognize in the fourth quarter of 2002 is
expected to be deferred into 2003.

Cost of sales, including forgiveness of note receivable (see Note
Receivable below), 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 margin percentage for the year decreased to 26.0% from
27.8% in 2001. 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 in the marketing services business 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 also
partially the result of lower Consumer Products margins as a result of an
increased mix of lower margin product. This decrease was partially offset
by higher margin revenues from Logistix.

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.

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 the Companys 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.

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.

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 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.

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.

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

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evaluate goodwill and indefinite life intangible assets for impairment. As a result of this evaluation, the
Company recorded a charge of $2,496, net of tax, in connection with the
goodwill resulting from the 1998 acquisition of Contract Marketing, Inc.
and U.S. Import and Promotions Co., collectively referred to as USI.
The transition charge is reflected as a cumulative effect of change in
accounting principles effective January 1, 2002. See Critical Accounting
Policies  Goodwill and Other Intangibles below.

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,
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.

Year ended December 31, 2001 compared to year ended December 31, 2000

Revenues in 2001 decreased $87,971, or 37.9%, to $144,316 from $232,287 in
2000. Marketing services revenues decreased $91,302, or 43.8%, to
$117,305 from $208,607 primarily as a result of decreased revenues
associated with Burger King programs in 2001 as compared to 2000 (see
below). This decrease was partially offset by marketing services revenues
generated by Logistix following its acquisition by the Company in July
2001. Consumer products revenues increased $3,331, or 14.1%, to $27,011
from $23,680 in 2000. This increase is primarily due to revenue generated
by Robot Wars® product subsequent to the Logistix acquisition.

Although the Companys share of Burger Kings custom promotional products
business in 2001 was consistent with 2000 levels, the dollar volume of
custom promotional product purchases by Burger King from the Company
declined in 2001 by approximately 49%.

Cost of sales decreased $68,141 to $104,129 (72.2% of revenues) from
$172,270 (74.2% of revenues) in 2000 due primarily to lower revenues in
2001. The gross margin percentage for the year increased to 27.8% from
25.8% in 2000. This increase is a result of a greater relative mix of
higher margin Consumer Products revenue and increased efficiencies
produced throughout the Companys operations.

Salaries, wages and benefits decreased $1,686 in 2001, or 9.6%, to $15,924
(11.0% of revenues) from $17,610 in 2000 (7.6% of revenues). The decrease
was primarily attributable to a reduction in performance bonuses for
employees in 2001. This decrease was partially offset by the addition of
employees from the acquisition of Logistix and staffing additions
resulting from the Companys growth initiatives.

Selling, general and administrative expenses decreased $4,752 in 2001, or
20.6%, to $18,323 (12.7% of revenues) from $23,075 (9.9% of revenues) in
2000. This decrease is due primarily to decreases in freight out,
warehousing costs, product development costs and bad debt all resulting
from the decrease in sales volume. This decrease is also attributable to
a decline in travel and entertainment expenses, marketing expenses and
outside services costs, partially offset by an increase in advertising
expense and insurance expense. The decrease is also attributable to a
reduction in amortization expense resulting from the write-off of the
goodwill and trademark in December 2000 associated with the 1998
acquisition of Corinthian Marketing, Inc. Selling, general and
administrative expenses increased as a percentage of revenues from 9.9% in
2000 to 12.7% in 2001 as a result of lower revenues, which decreased at a
greater rate.

The AmeriServe bad debt expense in 2000 represents a charge resulting from
the bankruptcy of AmeriServe. See Note Receivable below.

In 2000, the Company recorded a charge for impairment of assets of $8,504
for the write-off associated with the impairment of the goodwill and the
Headliners® trademark acquired in the Companys purchase in 1998 of
Corinthian Marketing Inc. The impairment is a result of the Companys
decision at the end of 2000 to decrease the marketing of the Headliners®
brand in the future and of its decision not to pursue new Headliners®
licenses or renew expiring licenses. This decision was pursuant to a
continued slowdown in sales in the sports collectible market.

The Logistix integration costs totaling $192 incurred in 2001 represent
expenses directly related to the integration of Logistix.

The restructuring gain recorded in 2000 primarily represents a reversal of
a portion of the 1998 restructuring charge related to outstanding
inventory purchase commitments and the lease commitment for a warehouse
facility. See Note 2, Restructuring Charge in the accompanying Notes to
Consolidated Financial Statements.

Other income is composed primarily of net interest income of $1,446 and a
loss on foreign exchange of $76. Net interest income

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decreased $41 in 2001 from $1,487 in 2000. The decrease was due to a decline in interest
rates and to the reduced level of cash, cash equivalents and marketable
securities as a result of the acquisition of Logistix and the stock
buyback program as well as a reduction in imputed interest income on a
note receivable (see Note Receivable below).

The effective tax rate changed in 2001 to 35.4% from 56.0% in 2000. This
decrease was due primarily to the write-off of non-deductible goodwill
related to Corinthian Marketing in 2000 and tax free municipal interest
income earned in 2001.

Net income decreased $741, or 13.9%, to $4,601 in 2001 (3.2% of revenues)
from $5,342 in 2000 (2.3% of revenues) primarily due to lower gross
profits earned on decreased revenues, partially offset by a decrease in
salaries and benefits, selling, general and administrative expenses and a
lower effective tax rate in 2001. 2000 net income was negatively impacted
by the impairment of assets and AmeriServe bankruptcy bad debt expense
incurred in 2000.

EBITDA

While many in the financial community
consider earnings before interest, taxes, depreciation and amortization (EBITDA) to be an important
measure of comparative operating performance and an indicator of an
entitys debt capacity, it should be considered in addition to, but not as
a substitute for or superior to, operating income, net earnings, cash flow
and other measures of financial performance prepared in accordance with
accounting principles generally accepted in the United States. EBITDA
does not reflect cash available to fund cash requirements, and the items
excluded from EBITDA, such as depreciation and amortization, are
significant components in assessing the Companys financial performance.
Other significant uses of cash flows are required before cash will be
available to the Company, including debt service, taxes and cash
expenditures for various long-term assets. Because many of the Companys key investors
use EBITDA to measure performance, the Company has included the table below. The Companys calculation of
EBITDA may be different from the calculation used by other companies and,
therefore, comparability may be limited. The Companys calculation of
EBITDA excludes the impact of: other income/expense, forgiveness of note receivable, integration
costs, restructuring charge and cumulative effect of change in accounting
principles, net of tax. The following table sets forth EBITDA for the
years indicated:

|                         |                                                                  |  |      |        |        |   |      |       |        |   |   |        |       |  
|------------------------ | ---------------------------------------------------------------- |  | ---- | ------ | ------ | - | ---- | ----- | ------ | - | - | ------ | ----- | -
|Years Ended December 31, |                                                                  |  | 2000 |        | 2001   |   | 2002
|                         |                                                                  |  |      |        |        |   |     
|Net income               |                                                                  |  | $    | 5,342  |        |   | $    | 4,601 |        |   | $ | 4,225  |      
|Less:                    | Interest income                                                  |  |      |        | (1,892 | ) |      |       | (1,695 | ) |   |        | (321  | )
|                         | Other income                                                     |  |      |        |       |   |      |       |       |   |   |        | (320  | )
|                         | Restructuring gain                                               |  |      |        | (418   | ) |      |       |       |   |   |        |      |  
|Add:                     | Forgiveness of note receivable                                   |  |      |        |       |   |      |       |       |   |   |        | 1,685 |  
|                         | Depreciation and amortization                                    |  |      |        | 2,655  |   |      |       | 2,477  |   |   |        | 1,831 |  
|                         | Interest expense                                                 |  |      |        | 405    |   |      |       | 249    |   |   |        | 258   |  
|                         | Other expense                                                    |  |      |        | 112    |   |      |       | 76     |   |   |        |      |  
|                         | Integration costs                                                |  |      |        |       |   |      |       | 192    |   |   |        | 453   |  
|                         | Restructuring loss                                               |  |      |        |       |   |      |       |       |   |   |        | 178   |  
|                         | Impairment of assets                                             |  |      |        | 8,504  |   |      |       |       |   |   |        |      |  
|                         | Provision for income taxes                                       |  |      |        | 6,797  |   |      |       | 2,517  |   |   |        | 3,786 |  
|                         | Cumulative effect of change in
accounting principles, net of tax |  |      |        |       |   |      |       |       |   |   |        | 2,496 |  
|                         |                                                                  |  |      |        |        |   |      |       |        |   |   |        |       |  
|EBITDA                   |                                                                  |  | $    | 21,505 |        |   | $    | 8,417 |        |   | $ | 14,271 |      
|                         |                                                                  |  |      |        |        |   |      |       |        |   |   |        |       |  

Financial Condition and Liquidity

The Companys financial position remained strong in 2002 primarily due to
its profitable operating results. At December 31, 2002, the Company had
no debt and its cash, cash equivalents and marketable securities were
$26,833, compared to $29,135 as of the prior year end.

As of December 31, 2002, the Companys net accounts receivable increased
$21,122 to $43,817 from $22,695 in 2001. This was primarily due to the higher
sales volume levels in 2002 as compared to 2001. This increase in accounts
receivable was also attributable to year end shipment delays as a result of the
West Coast port strike as well as additional receivables related to UPSHOT. At
December 31, 2002, inventories increased $7,026 to $16,363 from $9,337 in 2001.
This was primarily due to an increase in Marketing Services promotional product
inventories expected to be delivered in the first quarter 2003 relative to the
first quarter 2002. Marketing Services inventories represent 88% and 80% of
total inventories as of December 31, 2002 and December 31, 2001, respectively.
Promotional product inventory generally has lower risk than consumer product
inventory, as it usually represents product made to order.

At December 31, 2002, accounts payable increased $16,220 to $38,334 from
$22,114 in 2001. This increase is primarily attributable to increased
shipments of product occurring later in the fourth quarter of 2002 as a
result of the West Coast port strike as well as additional payables
related to the UPSHOT business. Due to customer increased $7,159 to $11,087 from $3,928 in 2001.
The increase in due to customer was primarily due to increased royalty and
administrative fees collected from distribution companies as a result of
the increase in sales in the fourth quarter 2002. At December 31, 2002,
accrued liabilities, including accrued payroll and payroll related costs,
increased $7,654 to $13,242 from $5,588 in 2001. The increase in accrued
liabilities was primarily attributable to additional accruals in
connection with the acquisition of UPSHOT, an accrual for employee
performance bonuses and to accrued freight costs
associated with shipments made in the fourth quarter 2002.

At December 31, 2002, working capital was $29,157 compared to $36,620 at
December 31, 2001. The decrease in working capital was primarily due to
the cash used in the acquisition of UPSHOT, cash used to repurchase the
Companys common stock (see Stock Repurchase below),
cash used to pay preferred stock dividends, and cash used for fixed asset
purchases, partially offset by
cash generated by operating activities for the year ended December 31,
2002.

The Companys current strategy and business plan calls for the
consummation of additional mergers and acquisitions as well as the
continued repurchase of the Companys common stock. The Company plans to
continue to evaluate the level of such expenditures in the context of the
capital available to it and changing market conditions.

The Company believes that its cash from operations, cash on hand at
December 31, 2002 and its credit facility will be sufficient to fund its
working capital needs for at least the next twelve months. The statements
set forth herein are forward-looking and actual results may differ
materially. 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, employment
agreements, guaranteed royalty commitments, minimum advertising
commitments and letters of credit as of December 31, 2002 are as follows:

|                        |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                        |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | 2007 |       | Thereafter |  | Total
|                        |  |      |       |      |  |      |       |      |  |      |       |            |  |      
|Operating Leases        |  | $    | 3,112 |      |  | $    | 3,224 |      |  | $    | 3,036 |            |  | $     | 3,080 |  |  | $ | 3,121 |  |  | $ | 5,512 |  |  | $ | 21,085 | 
|Guaranteed Royalties    |  |      | 2,064 |      |  |      | 1,314 |      |  |      | 1,925 |            |  |       |      |  |  |   |      |  |  |   |      |  |  |   | 5,303  | 
|Advertising Commitments |  |      | 1,000 |      |  |      | 367   |      |  |      |      |            |  |       |      |  |  |   |      |  |  |   |      |  |  |   | 1,367  | 
|Employment Agreements   |  |      | 1,840 |      |  |      | 1,227 |      |  |      |      |            |  |       |      |  |  |   |      |  |  |   |      |  |  |   | 3,067  | 
|                        |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|Total                   |  | $    | 8,016 |      |  | $    | 6,132 |      |  | $    | 4,961 |            |  | $     | 3,080 |  |  | $ | 3,121 |  |  | $ | 5,512 |  |  | $ | 30,822 | 
|                        |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 

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The Company had no material commitments for capital expenditures at
December 31, 2002. Letters of credit outstanding as of December 31, 2001
and 2002 totaled $551 and $823, respectively.

Credit Facilities

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

Acquisitions

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.

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

Issuance of Preferred Stock

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company (Crown), invested $11,900 in the Company in exchange for
preferred stock and warrants to purchase additional preferred stock. Under
the terms of the investment, Crown acquired 11,900 shares of Series A
mandatory redeemable senior cumulative participating convertible preferred
stock, par value $.001 per share, of the Company (the Series A Stock)
with a conversion price of $14.75 per share. In connection with such
purchase, the Company granted to Crown five year warrants (collectively,
the Warrants) to purchase 5,712 shares of Series B senior cumulative
participating convertible preferred stock, par value $.001 per share, of
the Company (the Series B Stock) at an exercise price of $1,000 per
share, and 1,428 shares of Series C senior cumulative participating
convertible preferred stock, par value $.001 per share, of the Company
(the Series C Stock) at an exercise price of $1,000 per share. The
Warrants are immediately exercisable. The conversion prices of the Series
B Stock and the Series C Stock are $16.00 and $18.00, respectively. On
June 20, 2000, Crown paid an additional $13,100 to the Company in exchange
for an additional 13,100 shares of Series A Stock with a conversion price
of $14.75 per share. In connection with such purchase, the Company
granted to Crown Warrants to purchase an additional 6,288 shares of Series
B Stock and an additional 1,572 shares of Series C Stock. Each share of
Series A Stock is convertible into 67.7966 shares of Common Stock,
representing 1,694,915 shares of Common Stock in aggregate. Each share of
Series B Stock and Series C Stock is convertible into 62.5 and 55.5556
shares of Common Stock, respectively, representing 916,666 shares of
Common Stock in aggregate. Also in connection with such purchase, the
Company agreed to pay Crown a commitment fee in the aggregate amount of
$1,250, paid in equal quarterly installments of $62.5 commencing on June
30, 2000 and ending on March 31, 2005. The Company paid $250 in fees for
the year ended December 31, 2002.

Upon any voluntary or involuntary liquidation, dissolution or winding-up
of the affairs of the Company, Crown, as holder of the preferred stock,
will be entitled to payment out of the assets of the Company available for
distribution of an amount equal to the greater of (a) the liquidation
preference of $1,000 per share (the Liquidation Preference) plus all
accrued and unpaid dividends or

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(b)  the aggregate amount of payment that
the outstanding preferred stock holder would have received assuming
conversion to Common Stock immediately prior to the date of liquidation of
capital stock, before any payment is made to other stockholders.

The Series A Stock, Series B Stock and Series C Stock are subject to
mandatory redemption at 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 preferred stock is convertible on the relevant record
date. Crown is also entitled to receive a quarterly dividend equal to 6%
of the Liquidation Preference per share outstanding, payable in cash.
Total dividend for the year ended December 31, 2002 amounted to $1,500, of
which $375 was paid in January 2003 and recorded in accounts payable in
the accompanying consolidated balance sheet as of December 31, 2002.

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

The Series A Stock is recorded in the accompanying 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.

Restructuring

During 2002, the Company formulated and implemented a restructuring plan in connection with
the UPSHOT acquisition in order to combine and streamline the operations of the
Company and UPSHOT. The Company evaluated the current cost structure of both
businesses. In connection with this plan the Company recorded a restructuring
charge of $178. This charge represents severance for a workforce reduction of
seven employees in the Companys Los Angeles office, who were terminated, and
is reflected as a restructuring charge in the accompanying consolidated
statement of operations. The workforce reduction included employees from the
Companys marketing services division as well as other support services.
$139 of the
restructuring charge was paid as of December 31, 2002.

In connection with the restructuring plan, the Company also decided to close
UPSHOTs Richmond, Virginia office and eliminate certain positions at UPSHOTs
Chicago, Illinois office. The liabilities assumed in connection with this plan
totaled $1,731 and are included as part of goodwill. $924 of these liabilities were paid as of
December 31, 2002.

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. In the period from July 12,
2002 to December 31, 2002, the Company spent $1,342 to repurchase 107,500
shares at an average price of $12.49 per share including commissions under
this authorization. The duration of the current buyback program is
indefinite; provided, however, that the Companys Board of Directors
intends to review the program quarterly. Purchases are conducted in the
open market at prevailing prices, based on market conditions when the
Company is not in a quiet period. The Company may also transact purchases
effected as block trades, as well as certain negotiated, off-exchange
purchases not in the open market. Since initiating the overall buyback
program on July 20, 2000, the Company has spent $13,377 to purchase a
total of 1,085,809 shares at an average price of $12.32 per share
including commissions, through December 31, 2002. This repurchase program
is being funded through working capital.

Inflation

The effect of inflation on the Companys operations during 2002 was
insignificant. The Company will continue its policy of controlling costs
and adjusting prices to the extent permitted by competitive factors.

Note Receivable

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

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Restaurant Services, Inc. (RSI), a not-for-profit purchasing cooperative that
has as its members Burger King franchisees and Burger King, is the exclusive
purchasing agent for the Burger King system of franchisee-owned and
company-owned restaurants located in the United States. Subsequent to January
31, 2000, the Company reached an agreement with RSI in which RSI purchased all
pre-petition trade receivables owed to the Company by AmeriServe in exchange
for a two-year non-interest-bearing note valued at $15,970 and satisfaction of
certain contractual obligations owed by the Company to RSI. This agreement
resulted in a net pre-tax charge of $1,014 for the quarter ended December 31,
1999. A note receivable of $10,515 was recorded on the consolidated balance
sheet as of December 31, 1999. $6,642 of the $28,774 pre-petition trade
receivables related to sales made in January 2000. Accordingly, the remaining
$5,455 portion of the note receivable was recorded in January 2000, and
resulted in a net pre-tax charge of $482 for the year ended December 31, 2000.
This charge was offset by $1,084 of imputed interest income, at 9% per annum,
recorded on the note receivable for 2000.

In December 2001, the due date for the final payment on the note was extended
from December 1, 2001 to September 30, 2002 due to ongoing discussions between
the Company and RSI. On May 15, 2002, the Company agreed to forgive the
remaining balance of $1,685 as consideration for a new interim Master Supply
Agreement with RSI. The Company recorded the forgiveness in the consolidated
statement of operations for the year ended December 31, 2002. Simultaneously
with the execution of the new interim Master Supply Agreement, the Company and
RSI also executed a Release and Settlement Agreement pursuant to which the
parties resolved certain outstanding issues that had arisen between the two
organizations over the prior three years. In connection with the Release and
Settlement Agreement, the
Company was released from any further liability incurred by RSI and associated
with the December 1999 recall of Pokémon balls included with Burger King kids
meals.

As of July 2000, the Burger King system completed a transition to alternative
distributors. The largest distribution company accounted for approximately
20.8% and 20.6% of the products purchased from the Company by the Burger King
system for the years ended December 31, 2001 and 2002, respectively. The
largest such distribution company accounted for 12.5% and 13.6% of accounts
receivable as of December 31, 2001 and 2002, respectively.

Subsequent Events

On February 27, 2003, the Company entered into a new employment agreement
(effective January 1, 2003) with Donald A. Kurz, the Companys Chairman
and Chief Executive Officer. The new agreement provides for the partial
buy-out of the Companys obligations to Mr. Kurz under an
existing post-employment
consulting agreement. The Companys future obligation to Mr. Kurz was
reduced by $601 in exchange for the current payment of $450 in four equal installments of $112 each on the last business
day of each calendar quarter during 2003.

Recent Accounting Pronouncements

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

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

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

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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 Company does not expect a
material impact on the consolidated financial statements as a result of
the adoption of FIN 45.

In January 2003, the FASB issued FIN
No. 46, Consolidation of Variable Interest Entities.
FIN 46 will be the guidance that determines (1) whether
consolidation is required under the controlling financial
interest model of Accounting Research Bulletin No. 51
(ARB 51), Consolidated Financial Statement
or, alternatively, (2) whether the variable interest model under
FIN 46 should be used to account for existing and new entities.
The variable interest model of FIN 46 looks to identify the
primary beneficiary of a variable interest entity. The
primarily beneficiary is the party that is exposed to the majority of
the risk or stands to benefit the most from the variable interest
entitys activities. A variable interest entity would be
required to be consolidated if certain conditions are met.
FIN 46 effective dates and transition provisions will be
required to preexisting entities as of the beginning of the first
interim period beginning after June 15, 2003. Management does
not believe that the adoption of this statement will have a material
impact on 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 the Companys consolidated financial position or
results of operations. The Company continues to account for its
stock-based compensation plans under APB Opinion No. 25. See Note 1 in
the accompanying Notes to Consolidated Financial Statements.

Critical Accounting Policies

The Company makes 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 the Company
considers most critical in preparing its consolidated financial statements.
Management has discussed the development and selection of each of these
critical accounting policies with its 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, 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, 2000, 2001 and 2002 totaled $347, $3,215 and
$13,895, 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, 2001 and 2002
totaled $0 and $230, 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.

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

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 the Company. In the case of its
Consumer Products segment, the Company must estimate the impact of retail
sell through on customer discounts and returns.

The Company regularly extends credit to several distribution companies in
connection with its business with Burger King. Failure by one or more
distribution companies to honor their payment obligations to us could have
a material adverse effect on the Companys operations. The largest such
distribution company accounted for 20.8% and 20.5% of the products
purchased from the

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Company by the Burger King system for the years ended
December 31, 2001 and 2002, respectively. The largest such distribution
company accounted for 12.5% and 13.6% of accounts receivable as of
December 31, 2001 and 2002, respectively.

The company also extends 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 the Companys operations.

The Company has 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. The Companys 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. The Company uses 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.

The Company records 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. The Company
believes that its allowances for doubtful accounts receivable and sales
returns at December 31, 2002 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 the Company to
perform a transitional goodwill impairment test, using values as of the
beginning of the fiscal year that SFAS No. 142 is adopted. The Company
completed the goodwill transitional impairment test in the second quarter
of 2002. As a result, the Company determined that a non-cash charge in
the amount of $2,496, net of tax, is required in connection with the
goodwill resulting from the 1998 acquisition of Contract Marketing, Inc.
and U.S. Import and Promotions Co., collectively referred to as USI.
The transition charge is reflected as a cumulative effect of change in
accounting principles effective January 1, 2002, and therefore, results
for the quarter ended March 31, 2002 have been adjusted retroactively.
The Company has adopted the provisions of these statements for the
acquisition of Logistix effective July 1, 2001 and for all other
acquisitions effective January 1, 2002. Accordingly, beginning on January
1, 2002, the Company has foregone all related goodwill amortization
expense, which totaled $485, net of tax effect, for the year ended
December 31, 2001.

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 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
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 2002, the Company
performed the annual impairment test required by SFAS No. 142 and
determined that its goodwill was not impaired as of December 31, 2002.

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.

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The Companys valuation method, requires it 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

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.

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 the Companys 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 vast majority of the Companys 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.

The Company bases its production schedules for consumer products on customer
orders, historical trends, results of market research and current market
information. The Company ships products in accordance with delivery schedules
specified by its customers, which usually request delivery within three months.
In anticipation of retail sales in the traditional holiday season in the
fourth quarter, the Company significantly increases its production in advance
of the peak selling period, resulting in a corresponding build-up of consumer
product inventory levels in the first three quarters of the year. These
seasonal purchasing patterns and requisite production lead times cause risk to
the Companys consumer product business associated with the underproduction of
popular products and the overproduction of products that do not match consumer
demand. Retailers are also attempting to manage their inventories more
tightly, requiring the Company to ship products closer to the time the
retailers expect to sell the products to consumers. These factors increase
inventory valuation risk since the Company may not be able to meet demand for
certain products at peak demand times, or that the Companys 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 the
Company participates. Economic changes may affect the sales of the Companys
consumer products and its corresponding inventory levels, which would
potentially impact the valuation of its 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 its allowance
for obsolescence at December 31, 2002 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.

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Cautionary Statements and Risk Factors

This section is written to be responsive to the Securities and Exchange
Commissions Plain English guidelines. In this section the words we,
our, ours and us refer only to Equity Marketing, Inc. and its
subsidiaries and not any other person. 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 largely dependent on a single customer, Burger King, which
accounted for approximately 80%, 66% and 65% of our revenues for the years
ended December 31, 2000, 2001 and 2002, respectively. The termination or a
significant reduction by Burger King of its business with us would
adversely affect our business. In December 2002, Burger King
announced that the Company will retain its role as Burger Kings
primary creative and manufacturing agency of record for Burger Kings
worldwide premium programs. The Burger King business is also subject
to significant year-to-year variability. For instance, the Companys
revenues generated by its business with Burger King dropped from $186,349
in 2000 to $95,405 in 2001 then increased to $133,987 in 2002. 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 Rely on the Continued Development of New Promotional Programs

A large portion of our revenues come from a relatively limited number of
promotional programs by Burger King, 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 Burger Kings annual promotions
calendar. There can be no assurance that we or our customer 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.

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 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. Often we spend substantial
resources in securing licenses and developing and manufacturing products
prior to a release of the motion picture or television program upon which
the products are based. 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. In this event, the trading price of our Common Stock may
fall significantly.

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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, 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 you 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.

We Face Credit Risk

We regularly extend credit to several distribution companies in connection
with our business with Burger King. Failure by one or more distribution
companies to honor their payment obligations to us could have a material
adverse effect on our operations. 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.

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 2002, approximately 95% 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. 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 would be adversely affected if we lost our relationship with
any 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.

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.

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Logistix enters into contracts denominated primarily in U.S. dollars,
British pounds sterling and Euros. Although the Company attempts 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 the Companys commitments and
anticipated foreign currency cash flows.

There Are Risks Associated with Acquisitions

If we are presented with appropriate opportunities, we intend to make
investments in complementary companies, products or technologies. 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.

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

Donald A. Kurz and Stephen P. Robeck beneficially own approximately 29%
and 16%, 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
the Companys 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, would be able to 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

The 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 of the
Company, 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.

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|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Impact of Interest Rate Changes

The amounts borrowed under the Companys credit facility are at variable
interest rates, and the Company is subject to market risk resulting from
interest rate fluctuations. No amounts were outstanding under the
facility throughout the year ended December 31, 2002.

Impact of Foreign Currency Fluctuation

Approximately 8% of the Companys revenues are denominated in foreign
currencies, and the Company is subject to market risks resulting from
fluctuations in foreign currency exchange rates. In certain instances, the
Company enters into foreign currency exchange contracts in order to reduce
exposure to changes in foreign currency exchange rates that affect the
value of its firm commitments and certain anticipated foreign currency
cash flows. The Company currently intends to continue to enter into such
contracts to hedge against future material foreign currency exchange rate
risks.

As of December 31, 2002, the Companys
Logistix subsidiary entered into two foreign currency forward contracts to
sell Euros in exchange for pound sterling aggregating GBP 411 at an
average rate of 1.59, which expire between January and March 2003. At
December 31, 2002, the foreign currency forward contracts had a balance of
GBP 411 and an estimated fair value of $(25).






|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

Reference is made to the Financial Statements referred to in the
accompanying Index setting forth the consolidated financial statements of
the Company, together with the reports of independent accountants
dated February 27, 2003.






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

None.

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PART III




ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table provides information with respect to the executive
officers and directors of the Company.

|                        |  |     |    |          |  |                                                                   
|----------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Donald A. Kurz          |  |     | 47 |          |  | Chairman of the Board and Chief Executive Officer                 
|Kim H. Thomsen          |  |     | 50 |          |  | President and Chief Creative Officer                              
|Bret R. Hadley          |  |     | 43 |          |  | President, Consumer and Promotional Products, Worldwide Operations
|Gaetano A. Mastropasqua |  |     | 39 |          |  | President, New Business and Client Services                       
|Ian Madeley             |  |     | 47 |          |  | President, International                                          
|Brian Kristofek         |  |     | 36 |          |  | President, UPSHOT                                                 
|Lawrence J. Madden      |  |     | 38 |          |  | Executive Vice President and Chief Financial Officer              
|Teresa L. Tormey        |  |     | 38 |          |  | Senior Vice President, General Counsel and Secretary              
|Sanford R. Climan       |  |     | 47 |          |  | Director                                                          
|Jonathan D. Kaufelt     |  |     | 51 |          |  | Director                                                          
|Mitchell H. Kurz        |  |     | 51 |          |  | Director                                                          
|Alfred E. Osborne, Jr.  |  |     | 58 |          |  | Director                                                          
|Bruce Raben             |  |     | 49 |          |  | Director                                                          
|Stephen P. Robeck       |  |     | 54 |          |  | Director                                                          
|Jason Ackerman          |  |     | 35 |          |  | Director                                                          
|Jeffrey S. Deutschman   |  |     | 46 |          |  | Director                                                          

Donald A. Kurzbecame Chairman and Chief Executive Officer of Equity
Marketing 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
Equity Marketing 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 Equity Marketing in 1991 and is currently
responsible for the creative direction for all of the Companys marketing
services and consumer products. She was promoted to her current post in
early 2000. Prior to joining Equity Marketing, she operated her own
business as a creative consultant. Ms. Thomsen earned her bachelors
degree from Cornell University.

Bret R. Hadleyjoined Equity Marketing in July 2001 and is responsible for
the Companys Consumer and Promotional 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. 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 Equity Marketing in 1997 as a Senior
Director responsible for the Companys Burger King account. Mr.
Mastropasqua oversees the Companys Burger King business.
He was promoted to his current post in July 2000, and has added oversight
of the companys 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 Madeleyjoined Equity Marketing in July 2001 and is responsible for the
operations of the Companys subsidiary, Logistix Limited, which the Company
acquired on July 31, 2001. Mr. Madeley had been the Managing Director of
Logistix since 1989. 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.

Brian Kristofekjoined Equity Marketing in July 2002 and is responsible for the
operations of the Companys UPSHOT division, which the Company acquired on July
17, 2002. Mr. Kristofek had been the President of UPSHOT since
2000 and
joined the company in 1998. Prior to joining UPSHOT, he was Brand Manager at
Anheuser-Busch, Inc. Mr. Kristofeks prior agency

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experience includes tenures at DArcy Masius Benton & Bowles and at Tathem Euro
RSCG. He holds a bachelors degree in marketing and advertising from Marquette
University.

Lawrence J. Maddenjoined Equity Marketing in November 2000 and is
currently responsible for the Companys finance, treasury, accounting,
legal and business affairs, human resources, administration and corporate
development functions. From October 1999 to October 2000, he served as
Executive Vice President and Chief Financial Officer for Atomic Pop, an
online music company. From November 1997 to October 1999, Mr. Madden was
the Senior Vice President and Chief Financial Officer for the recorded
music and music publishing investments of Wasserstein & Co., Inc. From
April 1994 to November 1997, he worked at PolyGram, a major entertainment
company based in New York, serving first as the top audit officer for the
corporations North American operations and later as the Vice President,
Finance and Administration for Def Jam Records, a PolyGram subsidiary.
Mr. Madden began his career with Ernst & Young in New York, where he
worked for eight years, from September 1986 to April 1994. Mr. Madden
received his masters in business administration from New York University
and his bachelors degree from Albany State University. He is also a
certified public accountant.

Teresa L. Tormeyjoined Equity Marketing in November 2002 as Senior Vice
President, General Counsel and Secretary. She is responsible for the
Companys legal, 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 from UC Davis and a juris doctor from Pepperdine
University.

Sanford R. Climanis President of Entertainment Media Ventures, Inc., a
Los Angeles-based firm focused on investment in entertainment and media,
talent representation, corporate advisory services, and motion picture and
television production. He has been an Equity Marketing director since
1998. From June 1997 through February 1999, he was a senior executive
with Creative Artists Agency (CAA). From October 1995 through May 1998,
he was an Executive Vice President for Universal Studios and, from June
1986 through September 1995, he was a senior executive with CAA. Mr.
Climan holds a bachelors degree from Harvard College, a masters of
science in health policy and management from Harvard School of Public
Health and a masters in business administration from Harvard Business
School.

Jonathan D. Kaufelt, a tax and business attorney, has been an Equity
Marketing director since November 2000. Mr. Kaufelt most recently led the
business and tax department at Armstrong, Hirsch, Jackoway, Tyerman &
Wertheimer, P.C., a leading entertainment law firm in Los Angeles. He
joined the firm in 1986, after nine years at two New York law firms  Kay,
Collyer & Boose from 1982 to 1986 and Simpson, Thacher & Bartlett from
1977 to 1982. Mr. Kaufelt earned a juris doctor from
Georgetown University, a master of laws in taxation from New York
University and a bachelors degree from the University of Pennsylvania.
He serves on the board of Planned Parenthood of Los Angeles and as a
trustee of Rutgers Preparatory School in Somerset, New Jersey.

Mitchell H. Kurzis the Chairman and founder of Kurz and Friends, a
consulting company to the global advertising and marketing services
business. He has been an Equity Marketing director since March 1999. Mr.
Kurz retired from Young & Rubicam Inc. in December 1998, following a
24-year career during which he held numerous executive positions. His
most recent position at Young & Rubicam was Chairman of client services,
where he oversaw key global client relationships representing
approximately 50% of the companys annual revenues. From 1996 to 1998, he
was President and Chief Operating Officer of Young & Rubicam Advertising,
and from 1992 to 1996, he was Worldwide Chief Executive Officer of
Wunderman Cato Johnson, a Young & Rubicam operating unit. Mr. Kurz
received his masters in business administration from Harvard Business
School and his bachelors degree from Dartmouth College. Mr. Kurz is the
brother of Donald A. Kurz, the Companys Chairman and Chief Executive
Officer.

Alfred E. Osborne, Jr.is the founder and director of the Harold Price
Center for Entrepreneurial Studies at UCLAs Anderson Graduate School of
Management. He has been an Equity Marketing director since December 2000.
Dr. Osborne joined UCLA in 1972, serves as a management professor, and
has served as an Associate Dean and the Director of the MBA program before
founding the Harold Price Center for Entrepreneurial Studies in 1987.
During that time, he was also the Brookings Institution Economic Policy
Fellow at the Securities and Exchange Commission. He is currently on the
Boards of Directors of Nordstrom, Inc. and K2, Inc., and is an individual
general partner of Technology Funding Venture Partners V and a trustee of
the WM Group of Funds. Dr. Osborne holds a doctorate in
business-economics, a masters in business administration, a masters in
economics and a bachelors degree all from Stanford University.

Bruce Rabenis currently a consultant to CIBC World Markets, an investment
banking firm where he served as managing director from 1995 to November
2002. He has been an Equity Marketing director since 1993. From 1990
through 1995, he was an Executive Vice President with Jeffries & Company,
an investment-banking firm. He is currently on the Board of Directors of
Whitewing Environmental Corp. and Fresh Direct Holdings ( a privately held
entity). Mr. Raben received a bachelors degree from Vassar College and a
masters in business administration from Columbia University Graduate
School of Business.

Stephen P. Robeckhas been an Equity Marketing director since 1989. From
January 1999 through December 2001, he served as a consultant to the
Company. He was elected Chairman and Co-Chief Executive officer in
September 1991 and served in that role through December 1998. Between
1987 and September 1991, he served as Chief Operating Officer. Mr. Robeck
received his bachelors degree from Lake Forest College.

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Jason Ackermanhas been a Managing Director of Crown Capital Group since
1997. He has been an Equity Marketing director since September 2001.
Prior to joining Crown Capital Group, he was a Senior Vice President in
the Corporate Finance Department of Donaldson Lufkin & Jenrette (DLJ),
in the Los Angeles office. At DLJ, he specialized in high yield
financings and financial restructurings for corporate clients, primarily
in the supermarket and specialty retail industries. Before joining DLJ in
1990, he served one year at Drexel Burnham Lambert as a financial analyst
in the Corporate Finance Department. Mr. Ackerman received his bachelors
degree from Boston University.

Jeffrey S. Deutschmanhas been a Managing Director of Crown Capital Group
since 1997. He has been an Equity Marketing director since March 2000.
Prior to joining Crown, he was a Partner at Aurora Capital Partners, a
leveraged buyout fund, from 1992 through 1995, a Partner at Deutschman,
Clayton & Company, an investment firm engaged in management buyout
transactions, from 1987 through 1991 and a Principal at Spectrum Group,
Inc., which specialized in leveraged acquisitions, from 1981 through 1986.
In January 2002, Mr. Deutschman was appointed Interim President of
Davidson Cotton Holdings and its subsidiary Davidson Cotton Company, which
made an assignment
for the benefit of creditors on December 31, 2002. Mr. Deutschman received a masters in business
administration from UCLAs Anderson Graduate School of Management and his
bachelors degree from Columbia University.

Additional information relating to this item appears under the caption
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE in the Companys
Proxy Statement relating to the Companys 2003 Annual Meeting of
Stockholders, which 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 the Companys
Proxy Statement relating to the Companys 2003 Annual Meeting of
Stockholders, which are incorporated herein by reference.






|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 AND RELATED STOCKHOLDER MATTERS
|-------- | -----------------------------------------------------------------------------------------------

Information relating to this item appears under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS in the Companys Proxy Statement relating to the
Companys 2003 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 the Companys Proxy Statement relating to the Companys 2003
Annual Meeting of Stockholders, which is incorporated herein by reference.






|ITEM 14. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Within ninety days prior to the filing of this report, the Companys Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness
of the design and operation of the Companys disclosure controls and
procedures, which are designed to insure that the Company records,
processes, summarizes and reports in a timely and effective manner the
information required to be disclosed in the reports filed with or
submitted to the Securities and Exchange Commission. Based upon this
evaluation, they concluded that, as of the date of the evaluation, the
Companys disclosure controls are effective. Since the date of this
evaluation, there have been no significant changes in the Companys
internal controls or in the other factors that could significantly affect
those controls.

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PART IV




ITEM 15.     EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K

(A)List of documents filed as part of this Report.

Financial Statements:

EQUITY MARKETING, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

|                                         |                                                                                                                                  |  |      |    | 
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                         |                                                                                                                                  |  | Page
|                                         |                                                                                                                                  |  |     
|Report of Independent Accountants        |                                                                                                                                  |  | 28   |   
|Report of Independent Public Accountants |                                                                                                                                  |  | 29   |   
|CONSOLIDATED FINANCIAL STATEMENTS:       |                                                                                                                                  |  |      |   
|                                         | Balance Sheets as of December 31, 2001 and 2002                                                                                  |  |      | 30 | 
|                                         | Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002                                                    |  |      | 31 | 
|                                         | Statements of Stockholders Equity and Mandatory Redeemable Preferred
Stock for the Years Ended December 31, 2000, 2001 and 2002 |  |      | 32 | 
|                                         | Statements of Comprehensive Income for the Years Ended December 31, 2000, 2001 and 2002                                          |  |      | 33 | 
|                                         | Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002                                                    |  |      | 34 | 
|                                         | Notes to Consolidated Financial Statements                                                                                       |  |      | 35 | 
|Supplemental Schedule:                   |                                                                                                                                  |  |      |   
|                                         | Report of Independent Accountants on Schedule II                                                                                 |  |      | 58 | 
|                                         | Report of Independent Public Accountants on Schedule II                                                                          |  |      | 59 | 
|                                         | Schedule II Valuation and Qualifying Accounts                                                                                    |  |      | 60 | 

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



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | (B)Reports on Form 8-K                                                                                 
|
| | Report on Form 8-K filed with the Securities and Exchange Commission
on March 01, 2002 (Items 5 and 7).
| | Report on Form 8-K filed with the Securities and Exchange Commission
on March 18, 2002 (Item 7).       
| | Report on Form 8-K filed with the Securities and Exchange Commission
on April 25, 2002 (Item 7).       
| | Report on Form 8-K filed with the Securities and Exchange Commission
on May 28, 2002 (Item 7).         
| | Report on Form 8-K filed with the Securities and Exchange Commission
on June 19, 2002 (Items 4 and 7). 
| | Report on Form 8-K filed with the Securities and Exchange Commission on
July 24, 2002 (Items 2 and 7). 
| | Report on Form 8-K filed with the Securities and Exchange Commission on
July 29, 2002 (Item 7).        
| | Report on Form 8-K filed with the Securities and Exchange Commission on
August 14, 2002 (Item 9).      
| | Report on Form 8-K filed with the Securities and Exchange Commission on
October 31, 2002 (Item 7).     
| | Report on Form 8-K filed with the Securities and Exchange Commission on
December 2, 2002 (Item 9).     
| | Report on Form 8-K/ A filed with the Securities and Exchange Commission on
December 6, 2002 (Item 7).  

27



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Report of Independent Accountants

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

In our opinion, the accompanying
consolidated balance sheet as of December 31, 2002 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 the results of
their operations and their cash flows for the year then ended 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 audit of
these statements in accordance with auditing standards generally accepted
in the United States of America, which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. The financial
statements of the Company as of December 31, 2001, and for each of the two
years in the period 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 27, 2003

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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



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##### Table of Contents



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

|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------ |  | ------ | ------- | ------- | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        | December 31,
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |             
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | 2001                                       |        | 2002        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |             
|ASSETS                                                                                                                                                                                                                            |                                                                                                                                                                  |                                            |        |              |        |  |        |        
|CURRENT ASSETS:                                                                                                                                                                                                                   |                                                                                                                                                                  |                                            |        |              |        |  |        |        
|                                                                                                                                                                                                                                  | Cash and cash equivalents                                                                                                                                        |                                            | $      | 21,935       |        |  | $      | 25,833  |        
|                                                                                                                                                                                                                                  | Marketable securities                                                                                                                                            |                                            |        | 7,200        |        |  |        | 1,000   |        
|                                                                                                                                                                                                                                  | Accounts receivable (net of allowances of $2,336 and $2,033
as of December 31, 2001 and 2002, respectively)                                                      |                                            |        | 22,695       |        |  |        | 43,817  |        
|                                                                                                                                                                                                                                  | Note receivable                                                                                                                                                  |                                            |        | 2,183        |        |  |        |        |        
|                                                                                                                                                                                                                                  | Inventories                                                                                                                                                      |                                            |        | 9,337        |        |  |        | 16,363  |        
|                                                                                                                                                                                                                                  | Deferred income taxes                                                                                                                                            |                                            |        | 2,436        |        |  |        | 3,038   |        
|                                                                                                                                                                                                                                  | Prepaid expenses and other current assets                                                                                                                        |                                            |        | 2,464        |        |  |        | 1,769   |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total current assets                       |        |              | 68,250 |  |        |         | 91,820  | 
|Fixed assets, net                                                                                                                                                                                                                 |                                                                                                                                                                  |                                            | 4,178  |              |        |  | 4,185  |        
|Goodwill, net                                                                                                                                                                                                                     |                                                                                                                                                                  |                                            | 24,690 |              |        |  | 33,730 |        
|Other intangibles, net                                                                                                                                                                                                            |                                                                                                                                                                  |                                            | 749    |              |        |  | 769    |        
|Deferred income taxes                                                                                                                                                                                                             |                                                                                                                                                                  |                                            |       |              |        |  | 584    |        
|Other assets                                                                                                                                                                                                                      |                                                                                                                                                                  |                                            | 1,620  |              |        |  | 2,166  |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total assets                               |        | $            | 99,487 |  |        | $       | 133,254 | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                              |                                                                                                                                                                  |                                            |        |              |        |  |        |        
|CURRENT LIABILITIES:                                                                                                                                                                                                              |                                                                                                                                                                  |                                            |        |              |        |  |        |        
|                                                                                                                                                                                                                                  | Short-term debt                                                                                                                                                  |                                            | $      |             |        |  | $      |        |        
|                                                                                                                                                                                                                                  | Accounts payable                                                                                                                                                 |                                            |        | 22,114       |        |  |        | 38,334  |        
|                                                                                                                                                                                                                                  | Due to customer                                                                                                                                                  |                                            |        | 3,928        |        |  |        | 11,087  |        
|                                                                                                                                                                                                                                  | Accrued payroll and payroll related costs                                                                                                                        |                                            |        | 464          |        |  |        | 1,677   |        
|                                                                                                                                                                                                                                  | Accrued liabilities                                                                                                                                              |                                            |        | 5,124        |        |  |        | 11,565  |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total current liabilities                  |        |              | 31,630 |  |        |         | 62,663  | 
|Deferred income taxes                                                                                                                                                                                                             |                                                                                                                                                                  |                                            | 590    |              |        |  |       |        
|Long-term liabilities                                                                                                                                                                                                             |                                                                                                                                                                  |                                            | 1,745  |              |        |  | 1,596  |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total liabilities                          |        |              | 33,965 |  |        |         | 64,259  | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|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, 20,000,000
shares authorized, 5,715,293 and 5,716,503 shares
outstanding as of December 31, 2001 and
2002, respectively |                                            |        |             |        |  |        |        |        
|                                                                                                                                                                                                                                  | Additional paid-in capital                                                                                                                                       |                                            |        | 20,050       |        |  |        | 21,641  |        
|                                                                                                                                                                                                                                  | Retained earnings                                                                                                                                                |                                            |        | 35,964       |        |  |        | 38,689  |        
|                                                                                                                                                                                                                                  | Accumulated other comprehensive income                                                                                                                           |                                            |        | 242          |        |  |        | 1,710   |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            | 56,256 |              |        |  | 62,040 |        
|Less                                                                                                                                                                                                                             |                                                                                                                                                                  |                                            |        |              |        |  |        |        
|                                                                                                                                                                                                                                  | Treasury stock, 2,869,793 and 3,007,108 shares at cost as of December 31, 2001
and 2002, respectively                                                            |                                            |        | (13,773      | )      |  |        | (15,506 | )      
|                                                                                                                                                                                                                                  | Unearned compensation                                                                                                                                            |                                            |        | (10          | )      |  |        | (588    | )      
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total stockholders equity                 |        |              | 42,473 |  |        |         | 45,946  | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                                                  | Total liabilities and stockholders equity |        | $            | 99,487 |  |        | $       | 133,254 | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                  |                                            |        |              |        |  |        |         |        

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

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

|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |           |        |       |        | 
|------------------------------------------------------------------------------------------------- | ------------------------------------------- | -------------------------------------- | ---------- | ------------------------ | ------ | ------------------------ | ------- | --------- | ------ | ----- | ------- | --------- | ------ | ----- | ------ | 
|                                                                                                  |                                             |                                        |            |                          |        | Years Ended December 31,
|                                                                                                  |                                             |                                        |            |                          |        |                         
|                                                                                                  |                                             |                                        |            |                          |        | 2000                     |         | 2001      |        | 2002 
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |      
|REVENUES                                                                                          |                                             | $                                      | 232,287    |                          |        | $                        | 144,316 |           |        | $     | 206,832 |          
|Cost of sales                                                                                     |                                             |                                        | 172,270    |                          |        |                          | 104,129 |           |        |       | 151,307 |          
|Forgiveness of note receivable                                                                    |                                             |                                        |           |                          |        |                          |        |           |        |       | 1,685   |          
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|Gross Profit                                                                                      |                                             |                                        | 60,017     |                          |        |                          | 40,187  |           |        |       | 53,840  |          
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|OPERATING EXPENSES:                                                                               |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  |                                             | Salaries, wages and benefits           |            |                          | 17,610 |                          |         |           | 15,924 |       |         |           | 20,662 |      
|                                                                                                  |                                             | Selling, general and administrative    |            |                          | 23,075 |                          |         |           | 18,323 |       |         |           | 22,423 |      
|                                                                                                  |                                             | AmeriServe bankruptcy bad debt expense |            |                          | 482    |                          |         |           |       |       |         |           |       |      
|                                                                                                  |                                             | Impairment of assets                   |            |                          | 8,504  |                          |         |           |       |       |         |           |       |      
|                                                                                                  |                                             | Integration costs                      |            |                          |       |                          |         |           | 192    |       |         |           | 453    |      
|                                                                                                  |                                             | Restructuring charge (gain)            |            |                          | (418   | )                        |         |           |       |       |         |           | 178    |      
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  |                                             |                                        |            | Total operating expenses |        |                          | 49,253  |           |        |       | 34,439  |           |        |       | 43,716 | 
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  |                                             |                                        |            | Income from operations   |        |                          | 10,764  |           |        |       | 5,748   |           |        |       | 10,124 | 
|OTHER (EXPENSE) INCOME:                                                                           |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  |                                             | Interest expense                       |            |                          | (405   | )                        |         |           | (249   | )     |         |           | (258   | )    
|                                                                                                  |                                             | Interest income                        |            |                          | 1,892  |                          |         |           | 1,695  |       |         |           | 321    |      
|                                                                                                  |                                             | Other income (expense)                 |            |                          | (112   | )                        |         |           | (76    | )     |         |           | 320    |      
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|Income before provision for income taxes and cumulative
effect of change in accounting principles |                                             |                                        | 12,139     |                          |        |                          | 7,118   |           |        |       | 10,507  |          
|PROVISION FOR INCOME TAXES                                                                        |                                             |                                        | 6,797      |                          |        |                          | 2,517   |           |        |       | 3,786   |          
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|INCOME
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLES                                |                                             |                                        | 5,342      |                          |        |                          | 4,601   |           |        |       | 6,721   |          
|Cumulative effect of change in accounting principles,
net of tax                                  |                                             |                                        |           |                          |        |                          |        |           |        |       | (2,496  | )        
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  |                                             |                                        | Net Income |                          |        | 5,342                    |         |           |        | 4,601 |         |           |        | 4,225 |       
|PREFERRED STOCK DIVIDENDS                                                                         |                                             |                                        | 956        |                          |        |                          | 1,500   |           |        |       | 1,500   |          
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|NET INCOME AVAILABLE TO COMMON STOCKHOLDERS                                                       |                                             | $                                      | 4,386      |                          |        | $                        | 3,101   |           |        | $     | 2,725   |          
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|BASIC INCOME PER SHARE:                                                                           |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|Income per share before cumulative effect of change
in accounting principles                      |                                             | $                                      | 0.70       |                          |        | $                        | 0.52    |           |        | $     | 0.91    |          
|Cumulative effect of change in accounting principles                                              |                                             |                                        |           |                          |        |                          |        |           |        |       | (0.44   | )        
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  | BASIC INCOME PER SHARE                      |                                        | $          | 0.70                     |        |                          | $       | 0.52      |        |       | $       | 0.48      |       
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  | BASIC WEIGHTED AVERAGE SHARES OUTSTANDING   |                                        |            | 6,275,590                |        |                          |         | 5,996,662 |        |       |         | 5,721,790 |       
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|DILUTED INCOME PER SHARE:                                                                         |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|Income per share before cumulative effect of change
in accounting principles                      |                                             | $                                      | 0.68       |                          |        | $                        | 0.50    |           |        | $     | 0.89    |          
|Cumulative effect of change in accounting principles                                              |                                             |                                        |           |                          |        |                          |        |           |        |       | (0.33   | )        
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  | DILUTED INCOME PER SHARE                    |                                        | $          | 0.68                     |        |                          | $       | 0.50      |        |       | $       | 0.56      |       
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          
|                                                                                                  | DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |                                        |            | 6,460,557                |        |                          |         | 6,164,154 |        |       |         | 7,590,018 |       
|                                                                                                  |                                             |                                        |            |                          |        |                          |         |           |        |       |         |          

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

31



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##### 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, 1999 |                                                            |  | 6,220,100 |              |   | $               |  |            |  |          |       |         |  | $        |       |        |  | $ | 15,942 |       |   | $ | 28,477 |       
|                           | Net income                                                 |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |       |  |   |        |      |   |   |        | 5,342  |  
|                           | Issuance of preferred stock and warrants                   |  |           |             |   |                 |   |           |  |          |        | 25,000  |  |          |        | 23,049 |  |   |        | 359   |   |   |        |       |  
|                           | Cancellation of shares pursuant to restricted
stock plan   |  |           | (2,905       | ) |                 |   |           |  |          |        |        |  |          |        |       |  |   |        | (48   | ) |   |        |       |  
|                           | Amortization of restricted stock grants                    |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |       |  |   |        |      |   |   |        |       |  
|                           | Exercise of stock options                                  |  |           | 209,985      |   |                 |   |           |  |          |        |        |  |          |        |       |  |   |        | 1,448 |   |   |        |       |  
|                           | Consulting services rendered in exchange
for stock options |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |       |  |   |        | 106   |   |   |        |       |  
|                           | Tax benefit from exercise of stock options                 |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |       |  |   |        | 402   |   |   |        |       |  
|                           | Preferred stock dividends                                  |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |       |  |   |        |      |   |   |        | (956   | )
|                           | Purchase of treasury stock                                 |  |           | (285,784     | ) |                 |   |           |  |          |        |        |  |          |        |       |  |   |        |      |   |   |        |       |  
|                           | Loan forgiveness                                           |  |           |             |   |                 |   |           |  |          |        |        |  |          |        |       |  |   |        |      |   |   |        |       |  
|                           |                                                            |  |           |              |   |                 |   |            |  |          |        |         |  |          |        |        |  |   |        |       |   |   |        |       
|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 |       
|                           |                                                            |  |           |              |   |                 |   |            |  |          |        |         |  |          |        |        |  |   |        |       |   |   |        |       

[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, 1999 |                                                            | $ |      |                   |   | $        | (2,129  | )            |   | $            | (21 | )     |  | $ | (244 | )    |   | $ | 42,025 |       
|                           | Net income                                                 |   |       |                  |   |          |         |             |   |              |     |      |  |   |      |     |   |   |        | 5,342  |  
|                           | Issuance of preferred stock and warrants                   |   |       |                  |   |          |         |             |   |              |     |      |  |   |      |     |   |   |        | 23,408 |  
|                           | Cancellation of shares pursuant to restricted
stock plan   |   |       |                  |   |          |         |             |   |              |     |      |  |   |      | 48   |   |   |        |       |  
|                           | Amortization of restricted stock grants                    |   |       |                  |   |          |         |             |   |              |     |      |  |   |      | 153  |   |   |        | 153    |  
|                           | Exercise of stock options                                  |   |       |                  |   |          |         |             |   |              |     |      |  |   |      |     |   |   |        | 1,448  |  
|                           | Consulting services rendered in exchange
for stock options |   |       |                  |   |          |         |             |   |              |     |      |  |   |      |     |   |   |        | 106    |  
|                           | Tax benefit from exercise of stock options                 |   |       |                  |   |          |         |             |   |              |     |      |  |   |      |     |   |   |        | 402    |  
|                           | Preferred stock dividends                                  |   |       |                  |   |          |         |             |   |              |     |      |  |   |      |     |   |   |        | (956   | )
|                           | Purchase of treasury stock                                 |   |       |                  |   |          |         | (3,648       | ) |              |     |      |  |   |      |     |   |   |        | (3,648 | )
|                           | Loan forgiveness                                           |   |       |                  |   |          |         |             |   |              |     | 10    |  |   |      |     |   |   |        | 10     |  
|                           |                                                            |   |       |                   |   |          |         |              |   |              |     |       |  |   |      |      |   |   |        |       
|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 |       
|                           |                                                            |   |       |                   |   |          |         |              |   |              |     |       |  |   |      |      |   |   |        |       

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

32



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##### Table of Contents



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

|                            |                                                             |   |                          |   |      |   |       |     |  |   |       |       |  
|--------------------------- | ----------------------------------------------------------- | - | ------------------------ | - | ---- | - | ----- | --- |  | - | ----- | ----- | -
|                            |                                                             |   | Years Ended December 31,
|                            |                                                             |   |                         
|                            |                                                             |   | 2000                     |   | 2001 |   | 2002 
|                            |                                                             |   |                          |   |      |   |      
|NET INCOME                  |                                                             | $ | 5,342                    |   |      | $ | 4,601 |     |  | $ | 4,225 |      
|OTHER COMPREHENSIVE INCOME: |                                                             |   |                          |   |      |   |       |     |  |   |       |      
|                            | Foreign currency translation adjustments                    |   |                          |  |      |   |       | 213 |  |   |       | 1,523 |  
|                            | Unrealized gain (loss) on foreign currency forward contract |   |                          |  |      |   |       | 29  |  |   |       | (55   | )
|                            |                                                             |   |                          |   |      |   |       |     |  |   |       |      
|COMPREHENSIVE INCOME        |                                                             | $ | 5,342                    |   |      | $ | 4,843 |     |  | $ | 5,693 |      
|                            |                                                             |   |                          |   |      |   |       |     |  |   |       |      

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

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

|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |         |   |        |  
|------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------ | ---------------------------------------------------- | ------ | ------------------------ | ------ | ------- | ------- | ---- | ------- | ------ | ------- | - | ------ | -
|                                                              |                                                                                   |                                                                  |        |                                                      |        | Years Ended December 31,
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                         
|                                                              |                                                                                   |                                                                  |        |                                                      |        | 2000                     |        | 2001    |         | 2002
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |       
|                                                              | Net income                                                                        |                                                                  | $      | 5,342                                                |        |                          | $      | 4,601   |         |      | $       | 4,225  |        
|                                                              | 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                                    |        |                                                      | 2,655  |                          |        |         | 2,477   |      |         |        | 1,831   |  
|                                                              |                                                                                   | Provision for bad debts                                          |        |                                                      | 1,225  |                          |        |         | 336     |      |         |        | 484     |  
|                                                              |                                                                                   | (Gain) loss on asset disposal                                    |        |                                                      | 117    |                          |        |         | (3      | )    |         |        | (15     | )
|                                                              |                                                                                   | Tax benefit from exercise of stock options                       |        |                                                      | 402    |                          |        |         | 557     |      |         |        | 93      |  
|                                                              |                                                                                   | Amortization of restricted stock                                 |        |                                                      | 153    |                          |        |         | 33      |      |         |        | 80      |  
|                                                              |                                                                                   | Forgiveness of note receivable                                   |        |                                                      |       |                          |        |         |        |      |         |        | 1,685   |  
|                                                              |                                                                                   | Impairment of assets                                             |        |                                                      | 8,504  |                          |        |         |        |      |         |        |        |  
|                                                              |                                                                                   | Consulting services rendered in exchange for stock options       |        |                                                      | 106    |                          |        |         |        |      |         |        |        |  
|                                                              |                                                                                   | Other                                                            |        |                                                      | 10     |                          |        |         | 14      |      |         |        | (20     | )
|                                                              | Changes in assets and liabilities-                                                |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|                                                              | Increase (decrease) in cash and cash equivalents:                                 |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|                                                              |                                                                                   | Accounts receivable                                              |        |                                                      | 6,023  |                          |        |         | 9,733   |      |         |        | (18,718 | )
|                                                              |                                                                                   | Note receivable                                                  |        |                                                      | 2,193  |                          |        |         | 6,139   |      |         |        | 498     |  
|                                                              |                                                                                   | Inventories                                                      |        |                                                      | (3,002 | )                        |        |         | 3,442   |      |         |        | (5,073  | )
|                                                              |                                                                                   | Deferred income taxes                                            |        |                                                      | 723    |                          |        |         | 1,304   |      |         |        | (697    | )
|                                                              |                                                                                   | Prepaid expenses and other current assets                        |        |                                                      | (413   | )                        |        |         | (1,674  | )    |         |        | 4,207   |  
|                                                              |                                                                                   | Other assets                                                     |        |                                                      | (262   | )                        |        |         | 851     |      |         |        | (542    | )
|                                                              |                                                                                   | Accounts payable                                                 |        |                                                      | (4,217 | )                        |        |         | (447    | )    |         |        | 14,645  |  
|                                                              |                                                                                   | Accrued liabilities                                              |        |                                                      | 2,393  |                          |        |         | (14,608 | )    |         |        | 5,811   |  
|                                                              |                                                                                   | Long-term liabilities                                            |        |                                                      | 128    |                          |        |         | 128     |      |         |        | (409    | )
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|                                                              |                                                                                   |                                                                  |        | Net cash provided by operating activities            |        |                          | 22,080 |         |         |      | 12,883  |        |         |   | 10,581 |  
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |       
|                                                              | Payment for purchase of Contract Marketing, Inc. and U.S. Import &
Promotions Co. |                                                                  |        | (349                                                 | )      |                          |        | (656    | )       |      |         |       |        
|                                                              | Payment for purchase of Logistix Limited, net of cash acquired of $1,750          |                                                                  |        |                                                     |        |                          |        | (11,405 | )       |      |         |       |        
|                                                              | Payment for purchase of UPSHOT                                                    |                                                                  |        |                                                     |        |                          |        |        |         |      |         | (9,891 | )      
|                                                              | Proceeds from sales of fixed assets                                               |                                                                  |        | 25                                                   |        |                          |        | 36      |         |      |         | 135    |        
|                                                              | Purchases of fixed assets                                                         |                                                                  |        | (921                                                 | )      |                          |        | (1,044  | )       |      |         | (982   | )      
|                                                              | Proceeds from sale of marketable securities, net                                  |                                                                  |        |                                                     |        |                          |        |        |         |      |         | 6,200  |        
|                                                              | Purchase of marketable securities, net                                            |                                                                  |        | (5,100                                               | )      |                          |        | (2,100  | )       |      |         |       |        
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|                                                              |                                                                                   |                                                                  |        | Net cash used in investing activities                |        |                          | (6,345 | )       |         |      | (15,169 | )      |         |   | (4,538 | )
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |       
|                                                              | Repayments on line of credit                                                      |                                                                  |        | (12,500                                              | )      |                          |        |        |         |      |         |       |        
|                                                              | Preferred stock dividends paid                                                    |                                                                  |        | (581                                                 | )      |                          |        | (1,500  | )       |      |         | (1,500 | )      
|                                                              | Net proceeds from issuance of preferred stock and warrants                        |                                                                  |        | 24,283                                               |        |                          |        |        |         |      |         |       |        
|                                                              | Purchase of treasury stock                                                        |                                                                  |        | (3,111                                               | )      |                          |        | (7,996  | )       |      |         | (1,733 | )      
|                                                              | Proceeds from exercise of stock options                                           |                                                                  |        | 1,448                                                |        |                          |        | 1,284   |         |      |         | 840    |        
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|                                                              |                                                                                   |                                                                  |        | Net cash provided by (used in) financing activities  |        |                          | 9,539  |         |         |      | (8,212  | )      |         |   | (2,393 | )
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|                                                              |                                                                                   |                                                                  |        | Net increase (decrease) in cash and cash equivalents |        |                          | 25,274 |         |         |      | (10,498 | )      |         |   | 3,650  |  
|Effects of exchange rate changes on cash and cash equivalents |                                                                                   |                                                                  |       |                                                      |        |                          | 28     |         |         |      | 248     |       
|CASH AND CASH EQUIVALENTS, beginning of year                  |                                                                                   |                                                                  | 7,131  |                                                      |        |                          | 32,405 |         |         |      | 21,935  |       
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|CASH AND CASH EQUIVALENTS, end of year                        |                                                                                   | $                                                                | 32,405 |                                                      |        | $                        | 21,935 |         |         | $    | 25,833  |       
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|CASH PAYMENTS DURING YEAR FOR:                                |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |       
|                                                              | Interest                                                                          |                                                                  | $      | 518                                                  |        |                          | $      | 189     |         |      | $       | 286    |        
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        
|                                                              | Taxes                                                                             |                                                                  | $      | 7,828                                                |        |                          | $      | 2,906   |         |      | $       | 218    |        
|                                                              |                                                                                   |                                                                  |        |                                                      |        |                          |        |         |         |      |         |        |        

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

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EQUITY MARKETING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(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, London, Paris and Hong Kong.
The Company focuses on the design and execution of strategy-based marketing
programs, with expertise in the areas of: strategic planning and research,
entertainment marketing, design and manufacturing of custom promotional
products, promotion, event marketing, collaborative marketing and
environmental marketing. The Companys clients include Burger King
Corporation, CVS/pharmacy, Diageo, Kelloggs, Discover Financial Services,
and Procter & Gamble, among others. The Company complements its core
marketing services and promotions business by developing and marketing
distinctive consumer products, based primarily on classic licensed
properties, which are sold through specialty and mass-market retailers.
The Company primarily sells to customers in the United States and Europe.
The Companys functional currency is United States dollars.

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

On July 31, 2001, the Company acquired 100% of the common stock of Logistix
Limited, a United Kingdom corporation (Logistix). Logistix is a marketing
services agency which focuses primarily on assisting consumer packaged goods
companies in their efforts to market to children between the ages of seven and
fourteen by developing and executing premium-based promotions and by providing
marketing consulting services. Logistix also derives a portion of its revenues
from a consumer products business which holds the license for the Robot Wars®
entertainment property, among others.

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

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, 2001 and 2002.

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. As of
December 31, 2002, the cost of marketable securities held approximates fair
value.

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.

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Marketable securities represent state and municipal debt securities with a
maturity date of January 1, 2030. The Company
intends to hold such securities only for the near term.

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, 2000, 2001 and 2002 totaled $347, $3,215 and $13,895, 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, 2001 and 2002, respectively, totaled
$0 and $230, respectively. Unbilled revenues are recorded in accounts
receivable in the accompanying consolidated balance sheet as of December
31, 2002. Unbilled revenues are expected to be billed and collected within
the next six months.

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

Inventories

Inventories consist of production-in-process, which primarily represents
tooling costs that are deferred and amortized over the life of the
products, purchased finished products held for sale to customers, and
purchased finished products 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,
|                      |  |             
|                      |  | 2001         |       | 2002
|                      |  |              |       |     
|Production-in-process |  | $            | 3,991 |      |  | $ | 5,062  | 
|Finished goods        |  |              | 5,346 |      |  |   | 11,301 | 
|                      |  |              |       |      |  |   |        | 
|                      |  | $            | 9,337 |      |  | $ | 16,363 | 
|                      |  |              |       |      |  |   |        | 

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.

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 requires amortization of goodwill recorded in connection with
previous business combinations to

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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 assets were in excess
of the book value of the related goodwill assets, including USI goodwill.
Therefore, for the year ended December 31, 2001, no goodwill assets, 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 2002, the Company performed the
annual impairment test required by SFAS No. 142 and determined that its goodwill
was not impaired as of December 31, 2002.

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, 2000, 2001 and 2002, amortization expense for goodwill
amounted to $1,091, $759 and $0, respectively. Goodwill relating to
acquisitions consummated on or after July 1, 2001 is not amortized.

For the years ended December 31, 2000 and 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,
|                                                                   |  |                         
|                                                                   |  | 2000                     |       | 2001
|                                                                   |  |                          |       |     
|Net income available to common stockholders, as reported           |  | $                        | 4,386 |      |  | $ | 3,101 | 
|Add back: Elimination of goodwill amortization (net of tax effect) |  |                          | 966   |      |  |   | 485   | 
|                                                                   |  |                          |       |      |  |   |       | 
|Net income available to common stockholders, as adjusted           |  | $                        | 5,352 |      |  | $ | 3,586 | 
|                                                                   |  |                          |       |      |  |   |       | 
|Diluted income per share                                           |  |                          |       |      |  |   |       | 
|Income per share, as reported                                      |  | $                        | 0.68  |      |  | $ | 0.50  | 
|Add back: Elimination of goodwill amortization (net of tax effect) |  |                          | 0.15  |      |  |   | 0.08  | 
|                                                                   |  |                          |       |      |  |   |       | 
|Income per share, as adjusted                                      |  | $                        | 0.83  |      |  | $ | 0.58  | 
|                                                                   |  |                          |       |      |  |   |       | 

The change in the carrying amount of goodwill from $24,690 as of December 31,
2001 to $33,730 as of December 31, 2002 reflects: the acquisition of UPSHOT of
$11,849, the USI goodwill impairment charge of $(4,000), a foreign currency
translation adjustment of $1,285 and an adjustment to reflect the net
reduction to goodwill for the Logistix acquisition of $(94). The entire balance
of the goodwill relates to the marketing services segment.

Identifiable intangibles of $749 and $769 as of December 31, 2001 and 2002,
respectively, a portion of which are subject to amortization, are included in
other intangibles in the consolidated balance sheets.

Other intangibles are summarized as follows:

|                                                      |          |   |                          |     |      |   |      |     | 
|----------------------------------------------------- | -------- | - | ------------------------ | --- | ---- | - | ---- | --- | 
|                                                      |          |   | Years Ended December 31,
|                                                      |          |   |                         
|                                                      |          |   | 2001                     |     | 2002
|                                                      |          |   |                          |     |     
|Amortized Intangible Assets                           |          |   |                          |     |      |   |      |    
|Equity Marketing, Inc. trademark                      |          | $ | 52                       |     |      | $ | 52   |    
|Licensing, royalty and standstill agreements          |          |   | 123                      |     |      |   | 136  |    
|Customer contracts and related customer relationships |          |   | 99                       |     |      |   | 238  |    
|Sales order backlog                                   |          |   | 144                      |     |      |   | 218  |    
|                                                      |          |   |                          |     |      |   |      |    
|                                                      | Subtotal |   |                          | 418 |      |   |      | 644 | 
|Less: Accumulated amortization                        |          |   | (200                     | )   |      |   | (461 | )  
|                                                      |          |   |                          |     |      |   |      |    
|                                                      |          |   | 218                      |     |      |   | 183  |    
|Unamortized Intangible Assets                         |          |   |                          |     |      |   |      |    
|Logistix trademark                                    |          |   | 531                      |     |      |   | 586  |    
|                                                      |          |   |                          |     |      |   |      |    
|Total Other Intangibles                               |          | $ | 749                      |     |      | $ | 769  |    
|                                                      |          |   |                          |     |      |   |      |    

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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 Recent Accounting Pronouncements and
Note 4). The licensing, royalty and standstill agreements along with the
customer contracts and related customer relationships were acquired in the
purchase of Logistix and are amortized over the lives of the respective
agreements which range from 2 to 3 years. 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. The
sales order backlog was also acquired in the purchase of UPSHOT and was
fully amortized as of December 31, 2002. (See Note 4). For the years
ended December 31, 2000, 2001 and 2002, amortization expense related to
other intangibles amounted to $141, $186 and $234, respectively.

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, 2001 and 2002, the amounts due to customer
were $3,928 and $11,087, 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.

At December 31, 2002, the Company has two stock option plans that are
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 plans and, accordingly, does not recognize
compensation cost for grants whose exercise price equals the market
price of the stock on the date of grant. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as
prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the table below:

|                                                          |  |      |       |      |  |      |       |  |  |   |       | 
|--------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                          |  | 2000 |       | 2001 |  | 2002
|                                                          |  |      |       |      |  |     
|Net income available to common stockholders - as reported |  | $    | 4,386 |      |  | $    | 3,101 |  |  | $ | 2,725 | 
|Less:                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|Compensation expense (a)                                  |  |      | 1,157 |      |  |      | 1,352 |  |  |   | 1,504 | 
|                                                          |  |      |       |      |  |      |       |  |  |   |       | 
|Net income available to common stockholders - pro forma   |  | $    | 3,229 |      |  | $    | 1,749 |  |  | $ | 1,221 | 
|                                                          |  |      |       |      |  |      |       |  |  |   |       | 
|Earnings per share:                                       |  |      |       |      |  |      |       |  |  |   |       | 
|Basic earnings per share, as reported                     |  | $    | 0.70  |      |  | $    | 0.52  |  |  | $ | 0.48  | 
|Pro forma basic earnings per share                        |  | $    | 0.51  |      |  | $    | 0.29  |  |  | $ | 0.21  | 
|Diluted earnings per share, as reported                   |  | $    | 0.68  |      |  | $    | 0.50  |  |  | $ | 0.56  | 
|Pro forma diluted earnings per share                      |  | $    | 0.50  |      |  | $    | 0.28  |  |  | $ | 0.36  | 



|(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:

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|                                |  |                          |       |         |  |         |       |   |  |  |       |  
|------------------------------- |  | ------------------------ | ----- | ------- |  | ------- | ----- | - |  |  | ----- | -
|                                |  | Years Ended December 31,
|                                |  |                         
|                                |  | 2000                     |       | 2001    |  | 2002   
|                                |  |                          |       |         |  |        
|Expected dividend yield         |  |                          | 0.00  | %       |  |         | 0.00  | % |  |  | 0.00  | %
|Expected stock price volatility |  |                          | 66.60 | %       |  |         | 62.65 | % |  |  | 60.00 | %
|Risk free interest rate         |  |                          | 6.40  | %       |  |         | 4.15  | % |  |  | 2.95  | %
|Expected life of options        |  | 5 years                  |       | 4 years |  | 4 years

The weighted average fair value of options granted during 2000, 2001 and
2002 is $5.99, $5.75 and $6.08, 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 1,327,666, 1,579,666 and 2,075,066 shares of the
Companys common stock (Common Stock), for the years ended December 31,
2000, 2001 and 2002, respectively, were excluded from the computation of
diluted EPS as they would have been anti-dilutive. For the years ended
December 31, 2000 and 2001, preferred stock convertible into 1,083,560 and
1,694,915, respectively, shares of Common Stock was excluded from the
computation of diluted EPS as it would have been anti-dilutive. For the
year ended December 31, 2002 preferred stock convertible into 1,694,915
shares of Common Stock was included in the computation of diluted EPS.

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,
|                               |                                                                    |                             |   | 2000                             |   | 2001          |   | 2002     
|                               |                                                                    |                             |   |                                  |   |               |   |          
|                               |                                                                    |                             |   | Income                           |   | Shares        |   | Per Share |         | Income      |   | Shares        |  | Per Share |   | Income      |   | Shares        |   | Per Share
|                               |                                                                    |                             |   | (Numerator)                      |   | (Denominator) |   | Amount    |         | (Numerator) |   | (Denominator) |  | Amount    |   | (Numerator) |   | (Denominator) |   | Amount   
|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |   |             |   |               |   |          
|Basic EPS:                     |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |   |             |   |               |   |           |         |  |   |      |  |  |       |       |   |  |   |           |           |  |   |     
|                               | Net income available to common
stockholders                        |                             | $ | 4,386                            |   |               |   | 6,275,590 |         |             | $ | 0.70          |  |           | $ | 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        |   |                                  |  |               |   |           | 184,967 |             |   |               |  |           |   |             |  |               |   |           | 167,492 |  |   |      |  |  |       |       |  |  |   |           | 173,313   |  |   |      |  | 
|                               |                                                                    | Convertible preferred stock |   |                                  |  |               |   |           |        |             |   |               |  |           |   |             |  |               |   |           |        |  |   |      |  |  |       |       |  |  |   |           | 1,694,915 |  |   |      |  | 
|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |   |             |   |               |   |           |         |  |   |      |  |  |       |       |   |  |   |           |           |  |   |      | 
|Dilutive EPS:                  |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |   |             |   |               |   |           |         |  |   |      |  |  |       |       |   |  |   |           |           |  |   |     
|                               | Net income available to common
stockholders and assumed conversion |                             | $ | 4,386                            |   |               |   | 6,460,557 |         |             | $ | 0.68          |  |           | $ | 3,101       |   |               |   | 6,164,154 |         |  | $ | 0.50 |  |  | $     | 4,225 |   |  |   | 7,590,018 |           |  | $ | 0.56 | 
|                               |                                                                    |                             |   |                                  |   |               |   |           |         |             |   |               |  |           |   |             |   |               |   |           |         |  |   |      |  |  |       |       |   |  |   |           |           |  |   |      | 

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

The Company regularly extends credit to several distribution companies in
connection with its business with Burger King Corporation (Burger King).
One of these distribution companies, AmeriServe, accounted for more than 50
percent of the products

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purchased from the Company by the Burger King
system in 1999. AmeriServe filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code on January 31, 2000. As of January 31,
2000, AmeriServe owed the Company $28,774 in trade receivables.

Restaurant Services, Inc. (RSI), a not-for-profit purchasing cooperative
that has as its members Burger King franchisees and Burger King, is the
exclusive purchasing agent for the Burger King system of franchisee-owned
and company-owned restaurants located in the United States. Subsequent to
January 31, 2000, the Company reached an agreement with RSI in which RSI
purchased all pre-petition trade receivables owed to the Company by
AmeriServe in exchange for a two-year non-interest-bearing note valued at
$15,970 and satisfaction of certain contractual obligations owed by the
Company to RSI. This agreement resulted in a net pre-tax charge of $1,014
for the quarter ended December 31, 1999. A note receivable of $10,515 was
recorded on the consolidated balance sheet as of December 31, 1999. $6,642
of the $28,774 pre-petition trade receivables related to sales made in
January 2000. Accordingly, the remaining $5,455 portion of the note
receivable was recorded in January 2000, and resulted in a net pre-tax
charge of $482 for the year ended December 31, 2000. This charge was
offset by $1,084 of imputed interest income, at 9% per annum, recorded on
the note receivable for 2000.

In December 2001, the due date for the final payment on the note was
extended from December 1, 2001 to September 30, 2002 due to ongoing
discussions between the Company and RSI. On May 15, 2002, the Company
agreed to forgive the remaining balance of $1,685 as consideration for a
new interim Master Supply Agreement with RSI. The Company recorded the
forgiveness in the consolidated statement of operations for the year ended
December 31, 2002. Simultaneously with the execution of the new interim
Master Supply Agreement, the Company and RSI also executed a Release and
Settlement Agreement pursuant to which the parties resolved certain
outstanding issues that have arisen between the two organizations over the
last three years. In connection with the Release and Settlement Agreement,
the Company is released from any further liability incurred by RSI and
associated with the December 1999 recall of Pokémon balls included with
Burger King kids meals.

Burger King, accounted for approximately 80%, 66% and 65% of the Companys
total revenues for the years ended December 31, 2000, 2001 and 2002,
respectively. As of July 2000, the Burger King system completed a
transition to alternative distributors. The largest distribution company
accounted for approximately 20.8% and 20.6 % of the products purchased from
the Company by the Burger King system for the years ended December 31, 2001
and 2002, respectively. The largest such distribution company accounted
for 12.5% and 13.6% of accounts receivable as of December 31, 2001 and
2002, 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.

Supplemental Cash Flow Information

During 1999, the Company sold a portion of its excess inventory to a
customer in exchange for credits toward future purchases of advertising
media. The credits were valued at $1,011 and could be used over a period
of five years. The Company utilized these credits from 1999 through 2002.

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, 2000, 2001 and
2002 such costs totaled $3,526, $2,441, and $2,584, respectively.

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

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transaction gains or losses are included in
determining net income. For the years ended December 31, 2001 and 2002,
respectively, the net transaction (loss) gain on foreign exchange of $(76)
and $305 were recorded in other income (expense) 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 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, 2002, the Companys Logistix subsidiary entered into two
foreign currency forward contracts to sell Euros in exchange for pound
sterling aggregating GBP 411 at an average rate of 1.59, which expire
between January and March 2003. At December 31, 2002, the foreign currency
forward contracts had a balance of GBP 411 and an estimated fair value of
$(25). The fair value of the foreign currency forward contract is recorded
in accrued expenses and other current liabilities in the accompanying
consolidated balance sheet as of December 31, 2002. The unrealized loss on
this contract 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.

Recent Accounting Pronouncements

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

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

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

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

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 continues to account for its stock-based compensation plans under
APB Opinion No. 25. (See Stock-Based Compensation)

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 Company does not expect a material impact on the consolidated
financial statements as a result of the adoption of FIN 45.

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

2.     RESTRUCTURING CHARGE

On December 21, 1998, the Company announced its decision to exit the
event-based-licensed consumer products business along with its retail
collectible pin business. In connection with this decision, the Company
recorded a restructuring charge of $4,121 in 1998. The restructuring
charge included a provision for projected minimum royalty guarantee
shortfalls associated with long-term licenses, which the Company has
decided to discontinue, severance for workforce reductions of 30 employees,
a provision for outstanding inventory purchase commitments on
purchase orders the Company has cancelled, and a provision for costs
associated with the planned closure of the Companys warehouse facility.
During 2000, the Company
reversed a portion of the restructuring reserves for inventory purchase
commitments and lease commitment for the warehouse facility as a result of
negotiated settlements with certain vendors and as a result of the
dismissal of a lawsuit from the landlord of the warehouse facility. These
reversals totaled $418 and are reflected as a restructuring gain in the
accompanying statements of operations for the year ended December 31, 2000.
The balance of the 1998 restructuring charge was $190 as of
December 31, 2002. This balance relates to remaining minimum
royalty guarantee shortfalls.

During 2002, the Company formulated and implemented a restructuring plan in connection with
the UPSHOT acquisition in order to combine and streamline the operations of the
Company and UPSHOT. The Company evaluated the current cost structure of both
businesses. In connection with this plan the Company recorded a restructuring
charge of $178. This charge represents severance for a workforce reduction of
seven employees in the Companys Los Angeles office, who were terminated, and
is reflected as a restructuring charge in the accompanying consolidated
statement of operations. The workforce reduction included employees from the
Companys marketing services division as well as other support services.
$139 of the restructuring charge was paid as of December 31, 2002.

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In connection with the restructuring plan, the Company also decided to
close UPSHOTs Richmond, Virginia office and eliminate certain positions at
UPSHOTs Chicago, Illinois office. The liabilities assumed in connection
with this plan totaled $1,731 and are included as part of goodwill in
accordance with EITF Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. $924 of these
liabilities were paid as of December 31, 2002.

3.     IMPAIRMENT OF ASSETS

As of December 31, 2000, as a result of continued weakness in the sports
collectible market and as a result of disappointing fourth quarter sales of
Headliners®, the Company decided to decrease the marketing of the
Headliners® brand and decided not to pursue new Headliners® licenses or
renew existing licenses. This decision triggered an impairment review of
the long-lived assets of Corinthian Marketing Inc. (Corinthian) which was
acquired in 1998. These consisted primarily of goodwill and the
Headliners® trademark. Based on revised projections of Corinthians
ongoing business, the Company calculated the present value of expected cash
flows (before interest) to determine the fair value of the assets.
Accordingly, the Company recorded an impairment charge of $8,504 for a
write-off of the goodwill and trademark associated with the Corinthian
purchase. Subsequent to the impairment write-off, the balances of the
goodwill and trademark were zero. This charge is reflected in impairment
of assets in the accompanying consolidated statement of operations for the
year ended December 31, 2000 and is reflected in the corporate segment.
See Note 11.

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

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 is being amortized over estimated
useful lives ranging from 0.4 to 3 years. Intangible assets associated with
the Logistix acquisition are accounted for in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Goodwill has an indefinite life
and is not amortized.

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On July 17, 2002, the Company consummated the acquisition of UPSHOT, a
marketing agency with expertise in promotion, event, collaborative and
environmental marketing. The Company financed the acquisition through its
existing cash reserves. The acquisition was consummated pursuant to an Asset Purchase Agreement,
dated May 22, 2002, by and among the Company, Promotional Marketing, LLC
(Promotional Marketing) and HA-LO Industries, Inc. (HA-LO) (the
Purchase Agreement). Under the terms of the Purchase Agreement, the
Company acquired the principal assets of Promotional Marketing (consisting
of the principal assets used in connection with the operation of the UPSHOT
business) for $9,206 in cash plus related transaction costs of $685. The
Company assumed the principal current liabilities of the UPSHOT business in
connection with the acquisition. In addition to the cash purchase price
paid at the closing, the Company may be obligated to pay additional
consideration to Promotional Marketing contingent upon the results of
certain performance targets attained in the twelve month period ending July
31, 2003. The additional consideration, if any, will be recorded as
goodwill. HA-LO, which is the parent company of Promotional Marketing, 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 under the purchase method of
accounting. The financial statements reflect the preliminary allocation of
the purchase price to the acquired net assets based on their estimated fair
values as of the acquisition date. The Company is in the process of
finalizing valuations of the individual assets and liabilities, which could
result in adjustments to goodwill and other intangibles. The allocation of
the purchase price may change based upon these valuations. The Companys
preliminary allocation of purchase price for the acquisition, based upon
estimated fair values is as follows:

|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Net current assets                            |  | $ | 5,105  |  
|Property, plant and equipment                 |  |   | 700    |  
|Other non-current assets                      |  |   | 1      |  
|Net current liabilities                       |  |   | (7,951 | )
|Non-current liabilities                       |  |   |       |  
|                                              |  |   |        |  
|Estimated fair value, net liabilities assumed |  |   | (2,145 | )
|Goodwill                                      |  |   | 11,849 |  
|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.

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
respective periods.

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

|                                                      |  |                          |           |      |  |      |           |   |  |   |           | 
|----------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- | - |  | - | --------- | 
|                                                      |  | Years Ended December 31,
|                                                      |  |                         
|                                                      |  | 2000                     |           | 2001 |  | 2002
|                                                      |  |                          |           |      |  |     
|Pro forma revenues                                    |  | $                        | 255,483   |      |  | $    | 186,061   |   |  | $ | 220,509   | 
|Pro forma net income (loss)                           |  | $                        | 4,984     |      |  | $    | (4,492    | ) |  | $ | 2,960     | 
|Pro forma basic income (loss) per share               |  | $                        | 0.64      |      |  | $    | (1.00     | ) |  | $ | 0.26      | 
|Pro forma diluted income (loss) per share             |  | $                        | 0.62      |      |  | $    | (1.00     | ) |  | $ | 0.25      | 
|Pro forma basic weighted average
shares outstanding   |  |                          | 6,275,590 |      |  |      | 5,996,662 |   |  |   | 5,721,790 | 
|Pro forma diluted weighted average
shares outstanding |  |                          | 6,460,557 |      |  |      | 5,996,662 |   |  |   | 5,895,103 | 

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.

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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,
|                                          |                       |   |             
|                                          |                       |   | 2001         |        | 2002
|                                          |                       |   |              |        |     
|Furniture, fixtures and equipment         |                       | $ | 2,830        |        |      | $ | 3,429  |       
|Computer software                         |                       |   | 3,215        |        |      |   | 3,513  |       
|Computer hardware                         |                       |   | 3,440        |        |      |   | 4,093  |       
|Leasehold improvements                    |                       |   | 1,480        |        |      |   | 1,464  |       
|                                          |                       |   |              |        |      |   |        |       
|                                          | Fixed assets, at cost |   |              | 10,965 |      |   |        | 12,499 | 
|Accumulated depreciation and amortization |                       |   | (6,787       | )      |      |   | (8,314 | )     
|                                          |                       |   |              |        |      |   |        |       
|                                          | Fixed assets, net     |   | $            | 4,178  |      |   | $      | 4,185  | 
|                                          |                       |   |              |        |      |   |        |       

For the years ended December 31, 2000, 2001 and 2002, depreciation expense
related to fixed assets was $1,423, $1,533 and $1,597, respectively.

6.     LINE OF CREDIT

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

As of December 31, 2001 and 2002, the marginal interest rate on available
borrowings under the respective credit agreements was 5.3% and 2.9%,
respectively. Letters of credit outstanding as of December 31, 2001 and
2002 totaled $551 and $823, respectively.

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, 2000, 2001, and 2002 were
$145, $241 and $303, respectively.

8.     STOCKHOLDERS EQUITY

Stock Options

The Company has three stock option plans, the 1996 Equity Marketing, Inc.
Stock Option Plan (the 1996 Employee Plan), the 2000 Equity Marketing,
Inc. Stock Option Plan (the 2000 Employee Plan and collectively with the
1996 Employee Plan, the Employee Plans) and the Non-Employee Director
Stock Option Plan (the Director Plan, and collectively with the Employee
Plans referred to as the Option Plans). A total of 3,490,000 shares of
Common Stock are reserved for issuance pursuant to options granted and to be granted under the Option Plans. 675,225 shares
are available for grant under the Option Plans as of December 31, 2002.
Options pursuant to the Employee Plans typically vest over three to five
years and expire ten years from the date of grant. The 1996 Employee Plan
expired in 2001. The 2000 Employee Plan expires in 2010. Options granted
pursuant to the Director Plan vest over six months to three years and
expire ten years from the date of grant. The Director Plan expires in 2003.

The Option Plans 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.

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

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, 1999 |           |  | 1,402,311   |          |             |  |               |        |             |   | 10.65          |       |  |  | 660,506                    |  |          | $ | 10.29 | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|                                 | Granted   |  |             | 722,750  |             |  |                |       |             |   |                | 10.46 |  |  |                            |  |          |   |       |  | 
|                                 | Exercised |  |             | (209,985 | )           |  |                |       |             |   |                | 11.72 |  |  |                            |  |          |   |       |  | 
|                                 | Canceled  |  |             | (250,256 | )           |  |                |       |             |   |                | 11.17 |  |  |                            |  |          |   |       |  | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 
|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 | 
|                                 |           |  |             |          |             |  |                |        |             |   |                |       |  |  |                            |  |          |   |       | 

The following table summarizes information about the Companys stock
options outstanding and exercisable as of December 31, 2002:

|                  |  |                     |           |                     |  |                |          |             |          |                |       |  |  |  |          |  |  |   |       |  | 
|----------------- |  | ------------------- | --------- | ------------------- |  | -------------- | -------- | ----------- | -------- | -------------- | ----- |  |  |  | -------- |  |  | - | ----- |  | 
|                  |  | OPTIONS OUTSTANDING |           | OPTIONS EXERCISABLE
|                  |  |                     |           |                    
|                  |  |                     |           |                     |  |                | WEIGHTED |             |          |                |       |  |  |  |          |  |  |   |      
|                  |  |                     |           |                     |  |                | AVERAGE  |             | WEIGHTED |                |       |  |  |  | WEIGHTED
|RANGE OF          |  | NUMBER              |           | REMAINING           |  | AVERAGE        |          | NUMBER      |          | AVERAGE       
|EXERCISE PRICES   |  | OUTSTANDING         |           | CONTRACTUAL LIFE    |  | EXERCISE PRICE |          | EXERCISABLE |          | EXERCISE PRICE
|                  |  |                     |           |                     |  |                |          |             |          |               
|$  4.00 - $  9.94 |  |                     | 645,666   |                     |  |                | 6.43     |             |          | $              | 8.84  |  |  |  | 272,250  |  |  | $ | 7.45  | 
|$10.00 - $12.10   |  |                     | 643,712   |                     |  |                | 8.32     |             |          | $              | 11.28 |  |  |  | 183,393  |  |  | $ | 11.18 | 
|$12.25 - $13.17   |  |                     | 607,500   |                     |  |                | 8.79     |             |          | $              | 12.99 |  |  |  | 160,100  |  |  | $ | 12.61 | 
|$13.25 - $28.13   |  |                     | 337,500   |                     |  |                | 5.77     |             |          | $              | 19.80 |  |  |  | 296,000  |  |  | $ | 20.68 | 
|                  |  |                     |           |                     |  |                |          |             |          |                |       |  |  |  |          |  |  |   |       |  | 
|                  |  |                     | 2,234,378 |                     |  |                | 7.54     |             |          | $              | 12.34 |  |  |  | 911,743  |  |  | $ | 13.40 | 
|                  |  |                     |           |                     |  |                |          |             |          |                |       |  |  |  |          |  |  |   |       |  | 

During 1998, the Company granted options to purchase 60,000 shares of
Common Stock to a member of the Board of Directors in exchange for
consulting services rendered. The securities vested through March 2001. On
December 14, 1998 these options were exchanged for options to purchase
40,000 shares of Common Stock at an exercise price of $7.50. Options to
purchase 33,334 shares of Common Stock have vested and been exercised as of
December 31, 2000. The fair value of these options was estimated at the
date of grant and repricing using the Black-Scholes option pricing model
with assumptions consistent with those shown in Note 1. For the years ended
December 31, 1999 and 2000, the Company recorded compensation expense of
approximately $172 and $106, respectively, related to these options.

In March 2000, the Company granted options to purchase 50,000 shares of
Common Stock to a member of the Board of Directors in exchange for services
rendered in connection with the Companys issuance of preferred stock.
These shares vested immediately and have an exercise price of $14.75. The
fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with assumptions consistent with those
shown in Note 1. These were valued at $359. This amount was recorded
as a reduction to mandatory redeemable preferred stock and as additional
paid-in-capital in the accompanying consolidated balance sheets as of
December 31, 2000.

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

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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
are immediately exercisable. The conversion prices of the Series B Stock
and the Series C Stock are $16.00 and $18.00, respectively. On June 20,
2000, Crown paid an additional $13,100 to the Company in exchange for an
additional 13,100 shares of Series A Stock with a conversion price of
$14.75 per share. In connection with such purchase, the Company granted to
Crown Warrants to purchase an additional 6,288 shares of Series B Stock and
an additional 1,572 shares of Series C Stock. Each share of Series A Stock
is convertible into 67.7966 shares of Common Stock, representing 1,694,915
shares of Common Stock in aggregate. Each share of Series B Stock and
Series C Stock is convertible into 62.5 and 55.5556 shares of Common Stock,
respectively, representing 916,666 shares of Common Stock in aggregate.
Also in connection with such purchase, the Company agreed to pay Crown a
commitment fee in the aggregate amount of $1,250, paid in equal quarterly
installments of $62.5 commencing on June 30, 2000 and ending on March 31,
2005. The Company paid $250 in fees for the year ended December 31, 2002.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the affairs of the Company, Crown, as holder of the preferred stock, will
be entitled to payment out of the assets of the Company available for
distribution of an amount equal to the greater of (a) the liquidation
preference of $1,000 per share (the Liquidation Preference) plus all
accrued and unpaid dividends or (b) the aggregate amount of payment that
the outstanding preferred 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, Series B Stock and Series C Stock are 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 preferred stock is convertible on the relevant record
date. Crown is also entitled to receive a quarterly dividend equal to 6%
of the Liquidation Preference per share outstanding, payable in cash. Total
dividends for the year ended December 31, 2002 amounted to $1,500, of which
$375 was paid in January 2003 and recorded in accounts payable in the
accompanying consolidated balance sheet as of December 31, 2002.

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

The Series A Stock is recorded in the accompanying 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 $1,342 to repurchase 107,500 shares at an average price of $12.49 per share including commissions under
this authorization through December 31, 2002. The duration of the current
buyback program is indefinite; provided, however, that the Companys Board
of Directors intends to review the program quarterly. Purchases are
conducted in the open market at prevailing prices, based on market
conditions when the Company is not in a quiet period. The Company may also
transact purchases effected as block trades, as well as certain negotiated,
off-exchange purchases not in the open market. Since initiating the
overall buyback program on July 20, 2000, the Company has spent $13,377 to
purchase a total of 1,085,809 shares at an average price of $12.32 per
share including commissions through December 31, 2002. This repurchase
program is being funded through working capital.

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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, 2001 and 2002, 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, 2002, 69,690 shares were available for issuance under the Plan.

As discussed above, under terms of the 2000 Equity Marketing, Inc. Stock
Option 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
$153, $33 and $80 in 2000, 2001 and 2002, respectively.

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,
|                |  |                         
|                |  | 2000                     |       | 2001 |  | 2002
|                |  |                          |       |      |  |     
|CURRENT:        |  |                          |       |      |  |      |       |  |  |   |       |  
|Federal         |  | $                        | 4,723 |      |  | $    | 539   |  |  | $ | 2,163 |  
|State and local |  |                          | 804   |      |  |      | 184   |  |  |   | 342   |  
|Foreign         |  |                          | 547   |      |  |      | 692   |  |  |   | 822   |  
|                |  |                          |       |      |  |      |       |  |  |   |       |  
|                |  |                          | 6,074 |      |  |      | 1,415 |  |  |   | 3,327 |  
|                |  |                          |       |      |  |      |       |  |  |   |       |  
|DEFERRED:       |  |                          |       |      |  |      |       |  |  |   |       |  
|Federal         |  |                          | 627   |      |  |      | 982   |  |  |   | 485   |  
|State and Local |  |                          | 96    |      |  |      | 112   |  |  |   | 73    |  
|Foreign         |  |                          |      |      |  |      | 8     |  |  |   | (99   | )
|                |  |                          |       |      |  |      |       |  |  |   |       |  
|                |  |                          | 723   |      |  |      | 1,102 |  |  |   | 459   |  
|                |  |                          |       |      |  |      |       |  |  |   |       |  
|                |  | $                        | 6,797 |      |  | $    | 2,517 |  |  | $ | 3,786 |  
|                |  |                          |       |      |  |      |       |  |  |   |       |  

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,
|                                                   |  |                         
|                                                   |  | 2000                     |       | 2001 |  | 2002
|                                                   |  |                          |       |      |  |     
|Tax at the Federal statutory rate                  |  | $                        | 4,176 |      |  | $    | 2,449 |   |  | $ | 3,614 | 
|State income taxes, net of the Federal tax benefit |  |                          | 636   |      |  |      | 240   |   |  |   | 141   | 
|Other                                              |  |                          | 1,985 |      |  |      | (172  | ) |  |   | 31    | 
|                                                   |  |                          |       |      |  |      |       |   |  |   |       | 
|                                                   |  | $                        | 6,797 |      |  | $    | 2,517 |   |  | $ | 3,786 | 
|                                                   |  |                          |       |      |  |      |       |   |  |   |       | 

Other reflects the effects of permanent differences such as amortization of
goodwill in 2000 and 2001, the write-off of the Corinthian goodwill in
2000, tax free municipal interest income earned in 2001 and 2002, and the
impact of foreign earnings which are taxed at different 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, 2001 and 2002 are as follows:

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|                                |                   |   |       |       |      |   |       |       | 
|------------------------------- | ----------------- | - | ----- | ----- | ---- | - | ----- | ----- | 
|                                |                   |   | 2001  |       | 2002
|                                |                   |   |       |       |     
|Allowance for doubtful accounts |                   | $ | 904   |       |      | $ | 752   |      
|Inventory reserve               |                   |   | 253   |       |      |   | 500   |      
|Accrued expenses                |                   |   | 539   |       |      |   | 971   |      
|Other                           |                   |   | 740   |       |      |   | 815   |      
|                                |                   |   |       |       |      |   |       |      
|                                | Total current     |   |       | 2,436 |      |   |       | 3,038 | 
|                                |                   |   |       |       |      |   |       |      
|Goodwill and other intangibles  |                   |   | (461  | )     |      |   | 511   |      
|Fixed assets                    |                   |   | (56   | )     |      |   | 7     |      
|Other                           |                   |   | (73   | )     |      |   | 66    |      
|                                |                   |   |       |       |      |   |       |      
|                                | Total non-current |   |       | (590  | )    |   |       | 584   | 
|                                |                   |   |       |       |      |   |       |      
|Total                           |                   | $ | 1,846 |       |      | $ | 3,622 |      
|                                |                   |   |       |       |      |   |       |      

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 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 $42 and
$2,222 at December 31, 2001 and 2002, respectively. The determination of
the tax liability upon repatriation is not practicable.

10.     COMMITMENTS AND CONTINGENCIES

Operating Leases

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

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

|           |  |   |        | 
|---------- |  | - | ------ | 
|Year       |  |   |        | 
|           |  |   |        | 
|2003       |  | $ | 3,112  | 
|2004       |  |   | 3,224  | 
|2005       |  |   | 3,036  | 
|2006       |  |   | 3,080  | 
|2007       |  |   | 3,121  | 
|Thereafter |  |   | 5,512  | 
|           |  |   |        | 
|Total      |  | $ | 21,085 | 
|           |  |   |        | 

Aggregate rental expenses for operating leases were $1,775, $1,783 and
$2,608 for the years ended December 31, 2000, 2001 and 2002, respectively.

Guaranteed Royalties

For the years ended December 31, 2000, 2001, and 2002, the Company incurred
$3,758, $3,691 and $4,680, 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, 2002, the Company has committed to pay total minimum guaranteed
royalties as follows:

|      |  |   |       | 
|----- |  | - | ----- | 
|Year  |  |   |       | 
|      |  |   |       | 
|2003  |  | $ | 2,064 | 
|2004  |  |   | 1,314 | 
|2005  |  |   | 1,925 | 
|      |  |   |       | 
|Total |  | $ | 5,303 | 
|      |  |   |       | 

Advertising Commitments

For the years ended December 31, 2000, 2001, and 2002, the Company incurred
$1,295, $1,657 and $1,013, respectively, in advertising expense. License
agreements for certain copyrights and trademarks require minimum
commitments for advertising over the respective terms of the licenses. As
of December 31, 2002, the Company has committed to advertise product as
follows:











|      |  |   |       | 
|----- |  | - | ----- | 
|Year  |  |   |       | 
|      |  |   |       | 
|2003  |  | $ | 1,000 | 
|2004  |  |   | 367   | 
|      |  |   |       | 
|Total |  | $ | 1,367 | 
|      |  |   |       | 

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Employment Agreement

As of December 31, 2002, the Company has employment agreements with key
executives. Guaranteed compensation under these agreements are as follows:

|      |  |   |       | 
|----- |  | - | ----- | 
|Year  |  |   |       | 
|      |  |   |       | 
|2003  |  | $ | 1,840 | 
|2004  |  |   | 1,227 | 
|      |  |   |       | 
|Total |  | $ | 3,067 | 
|      |  |   |       | 

Legal Proceedings

The Perper Matter

On February 1, 2002, Alan Perper filed a complaint (No. BC 267 408) against
the Company, Donald A. Kurz (Chairman of the Board and Chief Executive
Officer of the Company) and Gaetano Mastropasqua (President, New Business
and Client Services, of the Company) in the Superior Court of the State of
California, County of Los Angeles. The plaintiff is a former employee of
the Company who was terminated in November 2001. The complaint alleged
that the plaintiff was wrongfully terminated and sought compensatory
damages plus punitive damages, interest and attorneys fees. Pursuant to
indemnification agreements between the Company and each of Messrs. Kurz and
Mastropasqua, the Company was obligated to defend and indemnify them in
this matter. The matter was settled through mediation in December 2002.
The amount of the settlement was not significant.

General Litigation

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

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 80%, 66% and 65% of the
Companys consolidated revenues for the years ended December 31, 2000, 2001 and 2002,
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 provides various
services and produces promotional products used as free premiums or sold in
conjunction with the purchase of other items at a retailer or quick service
restaurant. Marketing services programs are used for marketing purposes by
both the companies sponsoring the promotions and the licensors of the
entertainment properties on which the promotional programs are often based.
The consumer products segment designs and contracts for the manufacture of
toys and other consumer products for sale to major mass market and
specialty retailers, who in turn sell the products to consumers.

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

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Industry Segments

|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|--------------------------------------------------------- |  | ---------------------------------------------- | ------- | -------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | 
|                                                          |  | As of and For the Year Ended December 31, 2000
|                                                          |  |                                               
|                                                          |  |                                                |         |          |  | Consumer  |        |       |  |   |         |   |  |  
|                                                          |  | Marketing Services                             |         | Products |  | Corporate |        | Total
|                                                          |  |                                                |         |          |  |           |        |      
|Total revenues                                            |  | $                                              | 208,607 |          |  | $         | 23,680 |       |  | $ |        |   |  | $ | 232,287 | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                              | 38,779  |          |  | $         | 490    |       |  | $ | (27,130 | ) |  | $ | 12,139  | 
|Provision (benefit) for income taxes                      |  |                                                | 14,570  |          |  |           | 184    |       |  |   | (7,957  | ) |  |   | 6,797   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Net income (loss)                                         |  | $                                              | 24,209  |          |  | $         | 306    |       |  | $ | (19,173 | ) |  | $ | 5,342   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Fixed asset additions, net                                |  | $                                              |        |          |  | $         |       |       |  | $ | 921     |   |  | $ | 921     | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Depreciation and amortization                             |  | $                                              | 751     |          |  | $         | 475    |       |  | $ | 1,429   |   |  | $ | 2,655   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Total assets                                              |  | $                                              | 57,195  |          |  | $         | 5,427  |       |  | $ | 47,920  |   |  | $ | 110,542 | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 

|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|--------------------------------------------------------- |  | ---------------------------------------------- | ------- | -------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | 
|                                                          |  | As of and For the Year Ended December 31, 2001
|                                                          |  |                                               
|                                                          |  |                                                |         |          |  | Consumer  |        |       |  |   |         |   |  |  
|                                                          |  | Marketing Services                             |         | Products |  | Corporate |        | Total
|                                                          |  |                                                |         |          |  |           |        |      
|Total revenues                                            |  | $                                              | 117,305 |          |  | $         | 27,011 |       |  | $ |        |   |  | $ | 144,316 | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                              | 18,688  |          |  | $         | 2,762  |       |  | $ | (14,332 | ) |  | $ | 7,118   | 
|Provision (benefit) for income taxes                      |  |                                                | 6,612   |          |  |           | 977    |       |  |   | (5,072  | ) |  |   | 2,517   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Net income (loss)                                         |  | $                                              | 12,076  |          |  | $         | 1,785  |       |  | $ | (9,260  | ) |  | $ | 4,601   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Fixed asset additions, net                                |  | $                                              |        |          |  | $         |       |       |  | $ | 1,041   |   |  | $ | 1,041   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Depreciation and amortization                             |  | $                                              | 857     |          |  | $         | 23     |       |  | $ | 1,597   |   |  | $ | 2,477   | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Total assets                                              |  | $                                              | 54,290  |          |  | $         | 5,364  |       |  | $ | 39,833  |   |  | $ | 99,487  | 
|                                                          |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 

|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------- | ------- | -------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | 
|                                                                                                                   |  | As of and For the Year Ended December 31, 2002
|                                                                                                                   |  |                                               
|                                                                                                                   |  |                                                |         |          |  | Consumer  |        |       |  |   |         |   |  |  
|                                                                                                                   |  | Marketing Services                             |         | Products |  | Corporate |        | Total
|                                                                                                                   |  |                                                |         |          |  |           |        |      
|Total revenues                                                                                                     |  | $                                              | 175,372 |          |  | $         | 31,460 |       |  | $ |        |   |  | $ | 206,832 | 
|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Income (loss) before provision (benefit) for
income taxes and cumulative effect of change
in accounting principles |  | $                                              | 26,378  |          |  | $         | 2,129  |       |  | $ | (18,000 | ) |  | $ | 10,507  | 
|Provision (benefit) for income taxes                                                                               |  |                                                | 9,449   |          |  |           | 695    |       |  |   | (6,358  | ) |  |   | 3,786   | 
|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Income (loss) before cumulative effect of change
in accounting principles                                          |  |                                                | 16,929  |          |  |           | 1,434  |       |  |   | (11,642 | ) |  |   | 6,721   | 
|Cumulative effect of change in
accounting principles, net of tax                                                   |  |                                                | 2,496   |          |  |           |       |       |  |   |        |   |  |   | 2,496   | 
|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Net income (loss)                                                                                                  |  | $                                              | 14,433  |          |  | $         | 1,434  |       |  | $ | (11,642 | ) |  | $ | 4,225   | 
|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Fixed asset additions                                                                                              |  | $                                              |        |          |  | $         |       |       |  | $ | 982     |   |  | $ | 982     | 
|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Depreciation and amortization                                                                                      |  | $                                              | 210     |          |  | $         | 66     |       |  | $ | 1,555   |   |  | $ | 1,831   | 
|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 
|Total assets                                                                                                       |  | $                                              | 62,382  |          |  | $         | 4,814  |       |  | $ | 66,058  |   |  | $ | 133,254 | 
|                                                                                                                   |  |                                                |         |          |  |           |        |       |  |   |         |   |  |   |         | 

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

|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |         | 
|----------------------- | ------------- | ---------------------------- | - | ------------------------------------------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                        |               |                              |   | As of and For the Years Ended December 31,
|                        |               |                              |   |                                           
|                        |               |                              |   | 2000                                       |         | 2001 |   | 2002   
|                        |               |                              |   |                                            |         |      |   |        
|Revenues:               |               |                              |   |                                            |         |      |   |         |         |  |   |        
|                        | United States |                              | $ | 193,420                                    |         |      | $ | 117,595 |         |  | $ | 160,364 |        
|                        | International |                              |   | 38,867                                     |         |      |   | 26,721  |         |  |   | 46,468  |        
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|                        |               | Total revenues               |   | $                                          | 232,287 |      |   | $       | 144,316 |  |   | $       | 206,832 | 
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|Income from operations: |               |                              |   |                                            |         |      |   |         |         |  |   |        
|                        | United States |                              | $ | 8,963                                      |         |      | $ | 4,997   |         |  | $ | 7,553   |        
|                        | International |                              |   | 1,801                                      |         |      |   | 751     |         |  |   | 2,571   |        
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|                        |               | Total income from operations |   | $                                          | 10,764  |      |   | $       | 5,748   |  |   | $       | 10,124  | 
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|Fixed assets, net:      |               |                              |   |                                            |         |      |   |         |         |  |   |        
|                        | United States |                              | $ | 3,979                                      |         |      | $ | 3,700   |         |  | $ | 3,747   |        
|                        | International |                              |   | 284                                        |         |      |   | 478     |         |  |   | 438     |        
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        
|                        |               | Total fixed assets           |   | $                                          | 4,263   |      |   | $       | 4,178   |  |   | $       | 4,185   | 
|                        |               |                              |   |                                            |         |      |   |         |         |  |   |         |        

12.     Related Party Transactions

Stephen P. Robeck, formerly Chairman of the Board and Co-Chief Executive
Officer, entered into a consulting agreement with the Company commencing on
January 1, 1999 and ending on December 31, 2001. The agreement provided
that Mr. Robeck would serve as a financial and business consultant to the
Company and be available to fulfill his obligations thereunder no less than
twenty hours per month. The agreement contained provisions restricting Mr.
Robecks ability to compete with the Company, while providing services as a
consultant, and to solicit the Companys employees through the first
anniversary of the end of the consulting period. Under the agreement, Mr.
Robeck received a consulting fee of $210 per year, a car allowance of $18
per year and certain medical, disability and life insurance benefits.

In April 2001, the Company contracted to purchase print management services
from ISG, a company controlled by Jeffrey S. Deutschman, Jason Ackerman and
affiliates. In 2001, the Company paid ISG approximately $460 in print
management fees. The Company believes that such services were negotiated on
an arms length basis. Mr. Deutschman, a director of the Company, is a
manager of Crown. Mr. Ackerman, a director of the Company, is a manager of
Crown.

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13.     SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

|                                            |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |           | 
|------------------------------------------- | ----------------------------------- | - | ------------------ | --------- | ------- | - | ------------ | --------- | ----------- | - | ------ | --------- |  | - | ------ | --------- | 
|                                            |                                     |   | Three Months Ended
|                                            |                                     |   |                   
|                                            |                                     |   | March 31           |           | June 30 |   | September 30 |           | December 31
|                                            |                                     |   |                    |           |         |   |              |           |            
|2001                                        |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|Revenues                                    |                                     | $ | 28,027             |           |         | $ | 28,237       |           |             | $ | 40,828 |           |  | $ | 47,224 |          
|Income from operations                      |                                     | $ | 746                |           |         | $ | 895          |           |             | $ | 2,683  |           |  | $ | 1,424  |          
|Net income available to
common stockholders |                                     | $ | 540                |           |         | $ | 485          |           |             | $ | 1,426  |           |  | $ | 650    |          
|Basic income per share:                     |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|                                            | Income per share                    |   | $                  | 0.09      |         |   | $            | 0.08      |             |   | $      | 0.24      |  |   | $      | 0.11      | 
|                                            | Weighted average shares
outstanding |   |                    | 6,106,644 |         |   |              | 6,061,811 |             |   |        | 5,978,322 |  |   |        | 5,822,280 | 
|Diluted income per share:                   |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |          
|                                            | Income per share                    |   | $                  | 0.09      |         |   | $            | 0.08      |             |   | $      | 0.23      |  |   | $      | 0.11      | 
|                                            | Weighted average shares
outstanding |   |                    | 6,310,608 |         |   |              | 6,175,984 |             |   |        | 7,877,538 |  |   |        | 5,969,811 | 

|                                            |                                     |   |                    |           |         |   |              |           |             |   |        |           |  |   |        |           | 
|------------------------------------------- | ----------------------------------- | - | ------------------ | --------- | ------- | - | ------------ | --------- | ----------- | - | ------ | --------- |  | - | ------ | --------- | 
|                                            |                                     |   | 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 | 

14.     SUBSEQUENT EVENTS

On February 27, 2003, the Company entered into a new employment agreement
(effective January 1, 2003) with Donald A. Kurz, the Companys Chairman and
Chief Executive Officer. The new agreement provides for the partial
buy-out of the Companys obligations to Mr. Kurz under an
existing post-employment
consulting agreement. The Companys future obligation to Mr. Kurz was
reduced by $601 in exchange for the current payment of $450
in four equal installments of $112 each on the last business
day of each calendar quarter during 2003.

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SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF LOS ANGELES AND STATE OF CALIFORNIA ON THE 31ST DAY OF MARCH,
2003.

| |                        |  |                                                                                     
| | ---------------------- |  | ------------------------------------------------------------------------------------
| | 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 Lawrence J. Madden, 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 31, 2003
|                                                 |  |                                                                                                   |  |               
|/s/ Lawrence J. Madden

Lawrence J. Madden       |  | Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 31, 2003
|                                                 |  |                                                                                                   |  |               
|/s/ Jason AckermanJason Ackerman                 |  | Director                                                                                          |  | March 31, 2003
|                                                 |  |                                                                                                   |  |               
|/s/ Sanford R. ClimanSanford R. Climan           |  | Director                                                                                          |  | March 31, 2003
|                                                 |  |                                                                                                   |  |               
|/s/ Jeffrey S. Deutschman

Jeffrey S. Deutschman |  | Director                                                                                          |  | March 31, 2003
|                                                 |  |                                                                                                   |  |               
|/s/ Jonathan D. Kaufelt

Jonathan D. Kaufelt     |  | Director                                                                                          |  | March 31, 2003
|                                                 |  |                                                                                                   |  |               
|Mitchell H. Kurz                                 |  | Director                                                                                          |  |               

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|                                                   |  |          |  |               
|-------------------------------------------------- |  | -------- |  | --------------
|/s/ Alfred E. Osborne, Jr.

Alfred E. Osborne, Jr. |  | Director |  | March 31, 2003
|                                                   |  |          |  |               
|/s/ Bruce Raben
Bruce Raben                        |  | Director |  | March 31, 2003
|                                                   |  |          |  |               
|/s/ Stephen P. Robeck

Stephen P. Robeck           |  | Director |  | March 31, 2003

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

I, Donald A. Kurz, certify that:

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

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

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

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

a.     designed such disclosure controls and procedures to ensure that
material information related to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b.     evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c.     presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

a.     all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b.     any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and

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

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

Donald A. Kurz
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)

Dated: March 31, 2002

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

I, Lawrence J. Madden, certify that:

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

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

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

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

a.     designed such disclosure controls and procedures to ensure that
material information related to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b.     evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c.     presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

a.     all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b.     any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and

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

| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | /s/ Lawrence J. Madden

Lawrence J. Madden
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

Dated: March 31, 2002

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Report of Independent 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 as of and for the year ended
December 31, 2002 included in this Form 10-K and have issued
our report thereon dated February 27, 2003. Our audit was 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 15 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. The information
related to the year ended December 31, 2002 included in this schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements as of and for the year ended
December 31, 2002 and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein
for the aforementioned period in
relation to the basic consolidated financial statements taken as a whole.

|                                                         
|---------------------------------------------------------
|/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
|                                                         
|Los Angeles, California
February 27, 2003                

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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  

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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, 2000                                  |  |              |       |                    |  |            |       |            |  |             |       |  |  |   |        |      |  |   |       | 
|Allowances for doubtful
accounts receivable
and sales returns |  | $            | 5,370 |                    |  | $          | 1,225 |            |  | $           | 199   |  |  | $ | (3,704 | )(A) |  | $ | 3,090 | 
|Restructuring reserves                                        |  |              | 1,728 |                    |  |            | (418  | )          |  |             |      |  |  |   | (1,115 | )    |  |   | 195   | 
|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   | 



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

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|        |  |                                                                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                            
|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. (8)                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                            
|10.5    |  | First Amendment to Credit Agreement by and between Bank of America,
N.A. and Equity Marketing, Inc., dated September 30, 2001. (10)                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                            
|10.6    |  | Second Amendment to Credit Agreement by and between Bank of America,
N.A. and Equity Marketing, Inc., dated February 8, 2002. (11)                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                            
|10.7    |  | Third Amendment to Credit Agreement by and between Bank of America,
N.A. and Equity Marketing, Inc., dated September 30, 2002. *                                                                                                                                                           

Executive Compensation Plans and Arrangements of the Company

|      |  |                                                                                                                                                                       
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8  |  | Form of Directors and Officers Indemnification Agreement. (3)                                                                                                       
|      |  |                                                                                                                                                                       
|10.9  |  | Equity Marketing, Inc. Amended and Restated Stock Option Plan. (3)                                                                                                    
|      |  |                                                                                                                                                                       
|10.10 |  | Equity Marketing Inc. Non-Employee Director Stock Option Plan. (2)                                                                                                    
|      |  |                                                                                                                                                                       
|10.11 |  | Employment Agreement dated January 1, 1999 between Equity Marketing, Inc. and Donald A. Kurz. (4)                                                                     
|      |  |                                                                                                                                                                       
|10.12 |  | Equity Marketing, Inc. 2000 Stock Option Plan. (7)                                                                                                                    
|      |  |                                                                                                                                                                       
|10.13 |  | First Amendment to Equity Marketing, Inc. 2000 Stock Option Plan. (9)                                                                                                 
|      |  |                                                                                                                                                                       
|21.   |  | Subsidiaries of the Registrant.*                                                                                                                                      
|      |  |                                                                                                                                                                       
|23.   |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                                               
|      |  |                                                                                                                                                                       
|99.1  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the SarbanesOxley Act of 2002 - Donald A. Kurz,
Chief Executive Officer.*    
|      |  |                                                                                                                                                                       
|99.2  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the SarbanesOxley Act of 2002 - Lawrence J. Madden,
Chief Financial Officer.*



---

(1)   Previously filed as an exhibit to the Registrants Annual Report on
Form 10-K for the year ended December 31, 1995, which is 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, which is 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, which is incorporated
herein by reference.

(4)   Previously filed as an exhibit to the Registrants Current Report on
Form 8-K dated April 16, 1999, which is incorporated herein by reference.

(5)   Previously filed as an exhibit to the Registrants Current Report on
Form 8-K dated April 11, 2000, which is incorporated herein by reference.

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(6)   Previously filed as an exhibit to the Registrants Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, which is incorporated
herein by reference.

(7)   Previously filed as an exhibit to the Registrants Notice of Annual
Meeting and Proxy Statement dated July 21, 2000, which is incorporated
herein by reference.

(8)   Previously filed as an exhibit to the Registrants Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001, which is incorporated
herein by reference.

(9)   Previously filed as an exhibit to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, which is incorporated herein
by reference.

(10) Previously filed as an exhibit to the Registrants Current Report on
Form 8-K dated November 16, 2001, which is incorporated herein by
reference.

(11) Previously filed as an exhibit to the Registrants Current Report on
Form 8-K dated March 18, 2002, which is incorporated herein by reference.

(*)   Filed herewith

62