<PAGE>
FORM 10-K
 
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 
(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, 1998
 
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 23346
 
EQUITY MARKETING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
DELAWARE                            13-3534145
(STATE OF OR OTHER JURISDICTION     (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
 
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:
 
                                    TITLE OF EACH CLASS
                                    Common Stock, $0.001 par value
 
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 stock held by non-affiliates 
of the registrant as of March 19, 1999 was $21,270,723.
 
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 19, 1999
Common Stock, $0.001 par value 6,202,151

Documents Incorporated by Reference: Certain portions of the Registrant's 
Proxy Statement relating to Registrant's annual meeting of stockholders 
scheduled to be held on May 26, 1999 are incorporated by reference into Part 
III of this Form 10-K.
 
                                                   Equity Marketing, Inc.      1
<PAGE>
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 1998
 
ITEMS IN FORM 10-K
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<S>           <C>                                       <C>
PART I                                                  Page
 
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<S>           <C>                                       <C>
 
ITEM 1.       BUSINESS                                     3
ITEM 2.       PROPERTIES                                   6
ITEM 3.       LEGAL PROCEEDINGS                            6
ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF
              SECURITY HOLDERS                             6
<CAPTION>
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PART II
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<S>           <C>                                       <C>
 
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                                   9
ITEM 7A.      QUANTITATIVE AND QUALITATIVE
              DISCLOSURES ABOUT MARKET RISK               15
ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY
              DATA                                        15
ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH
              ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
              DISCLOSURE                                  15
<CAPTION>
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PART III
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<S>           <C>                                       <C>
 
ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE
              REGISTRANT                                  16
ITEM 11.      EXECUTIVE COMPENSATION                      17
ITEM 12.      SECURITY OWNERSHIP OF CERTAIN
              BENEFICIAL OWNERS AND MANAGEMENT            17
ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED
              TRANSACTIONS                                17
<CAPTION>
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PART IV
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<S>           <C>                                       <C>
 
ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES
              AND REPORTS ON FORM 8-K                     18
</TABLE>
 
FORWARD-LOOKING STATEMENTS 
Several of the matters discussed in this document contain forward-looking 
statements that involve risks and uncertainties. Equity Marketing, Inc., a 
Delaware corporation (the "Company") wishes to caution readers that 
forward-looking statements are based on assumptions which may or may not 
prove accurate and accordingly are necessarily speculative. 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."

2    Equity Marketing, Inc.


<PAGE>
PART I
 
ITEM 1. BUSINESS
 
                                ($000's omitted)
 
GENERAL
Equity Marketing, Inc., a Delaware corporation ("Equity Marketing" or the 
"Company"), is a provider of integrated custom promotional products and 
services that builds sales and brand awareness for domestic and international 
quick service restaurant chains, oil and gas companies, packaged goods 
companies and mass market retailers. The Company also designs, develops and 
promotes consumer products that complement its promotions business and that 
are distributed primarily through mass market and specialty retailers, as 
well as international distributors. The Company's products include character 
figurines, action vehicles, plush toys, dolls, play sets, beverage 
containers, fashion accessories and a variety of other items. Programs of the 
promotions division of the Company, Equity Promotions ("Equity Promotions" or 
"Promotions"), are utilized primarily in promotional campaigns implemented by 
quick service restaurant and consumer products customers, which include 
Burger King Corporation ("Burger King"), Coca-Cola Company, Exxon Corp., 
Sunoco, Inc. and CVS Corp. Equity Consumer Products ("Equity Consumer 
Products" or "Consumer Products"), the consumer products division of the 
Company, designs and produces niche products based on trademarks owned by the 
Company such as Headliners-Registered Trademark- and Tub Tints-Registered 
Trademark- or on classic, time-tested licensed properties such as 
Scooby-Doo-TM- for sale to major mass market and specialty market retailers 
such as Toys 'R' Us, Inc. ("Toys 'R' Us"), Walmart Stores, Inc. ("Walmart"), 
Target Stores, Inc. ("Target"), Blockbuster Entertainment Group 
("Blockbuster"), and to various international distributors worldwide.
 
The Company's promotional programs are typically based upon characters from 
entertainment properties licensed by television and motion picture studios 
and others. Licenses for characters upon which Equity Promotions' programs 
are based are generally obtained directly by the Company's customers from 
licensors, including Warner Bros. Inc. ("Warner Bros."), Universal Studios 
("Universal"), Nickleodeon, 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 the 
promotional campaign implemented by the Company's customers and generally do 
not extend beyond the end of the promotional campaign. In contrast, Equity 
Consumer Products 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 believes its principal competitive advantages are its extensive
brand-building and sales-building experience developed over years of serving
Burger King and other customers, 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.
 
Beginning in December 1998, the Company is no longer pursuing new event movie 
licenses for the consumer products business. In addition, the Company has 
taken or is the process of taking steps to terminate the majority of existing 
entertainment licenses utilized by Equity Consumer Products. (See "Equity 
Consumer Products" below and Notes 2, 3 and 4 of the accompanying Notes to 
Consolidated Financial Statements.)
 
The Company is seeking to acquire other companies and is also investing in its
sales force and infrastructure to target new markets through internal growth. No
assurance can be given that the Company will find suitable acquisition
candidates or that it will be successful in consummating such transactions.
 
EQUITY PROMOTIONS
The Company's largest current market is the design and implementation of 
fully integrated promotional 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 for use in promotional programs run by its 
consumer products and oil and gas company customers. Premium-based promotions 
are used for marketing purposes by both the companies sponsoring the 
promotions 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
 
                                                   Equity Marketing, Inc.      3
<PAGE>
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.
 
Equity Promotions' principal strategy is to be a market-driven and 
customer-driven organization that seeks to be a strategic marketing partner 
with 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. Equity Promotions also intends to continue to 
diversify its promotions customer base outside of quick service restaurants 
and to continue to expand its relationship with Burger King. In connection 
with these strategic goals, in July 1998, the Company acquired substantially 
all of the assets of U.S. Import & Promotions Co., Inc. ("USI") and Contract 
Marketing, Inc. ("CMI"), two related companies with a primary focus on 
collectible toy truck promotions for oil and gas retailers. See Note 5 of the 
accompanying Notes to Consolidated Financial Statements. USI and CMI provide 
sales and account management services, creative and design services, 
management of overseas production of promotional products and warehousing and 
fulfillment services to their customers. In addition, in late 1998, the 
Company launched a sports promotions business designed to leverage the 
Company's existing Headliners-Registered Trademark-trademark, sports 
experience and sports licenses and aimed at major professional leagues and 
collegiate associations as well as individual teams and their corporate 
sponsors. (See "Equity Consumer Products" below.)
 
Equity Promotions performs a wide range of creative design, development,
production and fulfillment services for its customers. The Company assists
customers with promotional strategy, calendar planning, and concept development;
provides an initial evaluation of intellectual properties for which licenses are
available; advises customers as to which licenses are consistent with their
marketing objectives and sometimes assists customers in procuring such licenses.
The Company also proposes specific product and non-product based promotions
utilizing the properties secured by its customers; 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 customer. The Company also provides creative services as needed
to customers 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 other cases,
the Company provides the full range of its services.
 
The Company's international promotions 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 1998, the Company sold promotional
products internationally in the United Kingdom, Germany, Spain, Australia,
Philippines, South Africa, Mexico and throughout Latin America. The Company's
current strategy is to focus on domestic expansion of its Equity Promotions
business and reduce resources allocated to expansion in Europe, Latin America
and Asia.
 
Promotions revenues for the years ended December 31, 1996, 1997 and 1998 were 
$92,812, $116,022 and $116,280 or 83.1%, 79.3% and 73.1% of the Company's 
revenues, respectively. A single promotions customer, Burger King, accounted 
for 69.5%, 67.3% and 62.7% of the Company's total revenues for the years 
ended December 31, 1996, 1997 and 1998, respectively. See "Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations--Cautionary Statements and Risk Factors."
 
EQUITY CONSUMER PRODUCTS
Equity Consumer Products designs and manufactures toys and other consumer
products for sale to major mass market retailers such as Toys 'R' Us, Walmart
and Target, specialty market retailers such as Store of Knowledge, Zany Brainy
and Blockbuster and to various international distributors worldwide. These
products incorporate trademarks the Company owns such as Headliners-Registered
Trademark- or licenses of classic, time-tested properties the Company has
obtained from entertainment companies such as Warner Bros. and Universal. In
some cases, the products are based on the same licensed properties that are used
by Equity Promotions.
 
4    Equity Marketing, Inc.

<PAGE>
In April and May 1998, the Company obtained a three-year licensing agreement 
with Universal to design, manufacture, market and distribute toys for CURIOUS 
GEORGE and WOODY WOODPECKER & FRIENDS. Also in April 1998, the Company 
acquired Corinthian Marketing, Inc., a Delaware corporation ("Corinthian"), 
the producer and distributor of the Headliners-Registered Trademark-brand of 
collectible sports figurines. Headliners-Registered Trademark- are uniquely 
designed with oversized heads to capture the look and personality of popular 
professional athletes and are based on licensing relationships with Major 
League Baseball and the M.L.B. Players' Association, the National Hockey 
League and the N.H.L. Players' Association, and the National Football League, 
N.F.L. Players, Inc., N.F.L. Quarterback Club and the Collegiate Licensing 
Corporation. In May 1998, the Company obtained a three-year licensing and 
distribution agreement with NASCAR, the governing body of U.S. stock car 
racing to design, produce and distribute NASCAR-related collectible pins. 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-TM-, one of the longest-running children's cartoon shows in 
television history. In July 1998, the Company acquired the worldwide rights 
to manufacture, market and distribute Tub Tints-Registered Trademark-, a 
children's bath product consisting of effervescent tablets which dissolve in 
the bath and currently come in three colors: red, yellow and blue. Depending 
on which color tablets are mixed, a wide variety of colors can be created.
 
Equity Consumer Products' principal strategy is to focus on distinctive, niche
products that compliment its promotions business and are based on trademarks
owned by the Company or 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 intends to implement this strategy
through both internal growth and acquisitions. No assurance can be given that
the Company will be successful in obtaining or renewing licenses under
satisfactory terms or that the Company will find suitable acquisition
candidates.
 
Beginning in December 1998 and consistent with its strategy, the Company is no
longer pursuing new event movie licenses for the consumer products business. In
addition, the Company has taken or is the process of taking steps to terminate
the majority of existing entertainment licenses utilized by Equity Consumer
Products.
 
Equity Consumer Products' revenues were $18,875, $30,306 and $42,856 or 16.9%,
20.7% and 26.9% of the Company's total revenues, for the years ended December
31, 1996, 1997 and 1998, respectively.
 
BACKLOG
Order backlog at December 31, 1997 and 1998 was approximately $41,264 and
$68,792 respectively. The Company expects the 1998 order backlog to be filled by
December 31, 1999.
 
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. Products manufactured in the Far 
East represented approximately 98% of the Company's 1998 production. 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.
 
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. Equity Marketing is
the owner of the trademarks associated with Headliners-Registered Trademark-.
 
COMPETITION
The domestic and international promotions and consumer products businesses are
highly competitive. In its core domestic promotions business, Equity Marketing
competes with several other companies, the most significant of which is Alcone
Marketing Group, a subsidiary of the Omnicom Group, Inc. Other competitors in
promotions include Promotional Partners International and Simon Marketing, Inc.,
a division of Cyrk, Inc. Competition in the international promotions industry
includes local companies in each market and a small number of emerging
international promotions companies. The Company expects that in 1999, the
principal competitors to the Company's consumer
 
                                                   Equity Marketing, Inc.      5
<PAGE>
products business will be smaller toy companies like Play By Play Toys &
Novelties, Inc. and Toy Biz, 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 Equity Consumer Products. The Company
believes the principal competitive factors affecting its business are creative
execution, license selection, price, product quality and speed of production.
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.
 
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 "Consumer Commission") to protect the public against 
unreasonable risks of injury associated with consumer products, including 
toys and other articles. The Consumer Commission has the authority to exclude 
from the market articles which are found to be hazardous and can require a 
manufacturer to repair or repurchase such toys under certain circumstances. 
Any such determination by the Consumer Commission is subject to court review. 
Violations of the Acts may also result in civil and criminal penalties. 
Similar laws exist in some states and cities in the United States and in many 
jurisdictions throughout the world. 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.
 
EMPLOYEES
As of December 31, 1998, Equity Marketing employed 157 individuals, including 38
individuals employed by and located at Equity Marketing HK. 15 of these
employees have been or will be terminated subsequent to December 31, 1998 in
connection with the Company's decision to exit certain business activities (see
note 2 in the accompanying notes to consolidated financial statements). 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.
 
ITEM 2. PROPERTIES
 
On January 4, 1999, Equity Marketing occupied its new corporate offices and
studio facilities of approximately 54,000 square feet of leased space in Los
Angeles, California. The lease expires July 31, 2005. Equity Marketing's former
corporate offices and studio facilities occupied approximately 28,000 square
feet of leased space in Beverly Hills, California. The lease expires October 31,
2005. Equity Marketing has entered into a sublease of the former corporate
offices that expires on the same date as Equity Marketing's lease. Equity
Marketing Hong Kong, Ltd. occupies approximately 6,000 square feet of leased
space in Hong Kong, under a lease which expires November 30, 1999.
 
ITEM 3. LEGAL PROCEEDINGS
 
In 1994, a complaint was filed by an individual who claimed he was entitled 
to compensation as a result of his having introduced the Company to 
Josephthal Lyon & Ross Incorporated, the representative of the underwriters 
for the Company's initial public offering ("the Offering"). The complainant 
sought a "finders fee" of "not less than 4% of the cash and 150 basis points 
in stock warrants based upon the stock sold in the Offering." Josephthal Lyon 
& Ross Incorporated is defending the action on behalf of the Company and has 
agreed to indemnify the Company and each of its officers and directors from 
and against any and all damages resulting from a final non-appealable 
judgement against the Company in such litigation. In March 1998, a judgement 
was obtained in favor of the plaintiff for approximately $74, plus interest 
thereon from May 2, 1994. The judgement was appealed by the plaintiff. Oral 
arguments in the appeal were heard on February 9, 1999. In a unanimous 
decision issued on March 2, 1999, the appeal was denied.
 
The Company is involved in various legal proceedings generally incidental to its
business. While the result of any litigation contains an element of uncertainty,
management presently believes that the outcome of any known, pending or
threatened legal proceeding or claim, individually or combined, will not have a
material adverse effect on the Company's financial position or results of
operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
6    Equity Marketing, Inc.

<PAGE>
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 National Market under the
symbol EMAK.
 
As of March 15, 1999, there were approximately 1,750 holders of record 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 without the
prior consent of the lenders. See Note 8 of the accompanying Notes to
Consolidated Financial Statements.
 
The following table sets forth the high and low sales prices on the Nasdaq
National Market for the calendar periods indicated:
 
Price Range of Common Stock
 
<TABLE>
<CAPTION>
 
                                        1997                  1998
                                ------------------------------------------
                                     high        low       high        low
<S>                             <C>        <C>        <C>        <C>
                                ------------------------------------------
First Quarter                      21 1/4     16 1/4         27   19 15/16
Second Quarter                     26 1/2     16 1/4     24 1/8     19 5/8
Third Quarter                      30 3/4     23 1/4     21 7/8      6 1/4
Fourth Quarter                     30 1/2     23 3/8     11 1/2      5 3/8
</TABLE>
 
                                                   Equity Marketing, Inc.      7

<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
 
The following table presents certain selected consolidated financial and
operating data for the Company as of and for each of the years in the five-year
period ended December 31, 1998. The selected consolidated financial and
operating data in the tables should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto, which have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report included elsewhere herein and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
<TABLE>
<CAPTION>
(in thousands, except                      Year Ended December 31,
share and per share data)       1994       1995       1996       1997       1998
<S>                        <C>        <C>        <C>        <C>        <C>
--------------------------------------------------------------------------------
 
CONSOLIDATED STATEMENTS
 OF OPERATIONS AND PER 
 SHARE DATA:
 
Revenues                     $61,776    $84,015   $111,687   $146,328   $159,136
 
OPERATING EXPENSES:
 
   Cost of sales              46,831     63,341     81,440    107,961    114,840
   Provision for
    production-in-process
    losses                        --         --         --         --      2,666
   Salaries, wages and
    benefits                   5,072      6,678      8,877     10,631     13,403
   Selling, general and
    administrative             4,706      7,044      9,955     12,611     20,587
   Impairment of assets           --         --         --         --      6,712
   Restructuring                  --         --         --         --      4,121
   Business process
    reengineering                 --         --         --         --      2,220
   Relocation expense            882         --         --         --         --
--------------------------------------------------------------------------------
   Total operating
    expenses                  57,491     77,063    100,272    131,203    164,549
--------------------------------------------------------------------------------
  Income (loss) from
   operations                  4,285      6,952     11,415     15,125     (5,413)
Other income (expense),
 net                             112        449        259        522       (511)
--------------------------------------------------------------------------------
  Income (loss) before
   provision for income
   taxes                       4,397      7,401     11,674     15,647     (5,924)
Provision for income
 taxes                         1,847      2,812      4,231      6,024         69
--------------------------------------------------------------------------------
   Net income (loss)         $ 2,550    $ 4,589   $  7,443   $  9,623   $ (5,993)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
BASIC INCOME (LOSS) PER
 SHARE:
   Earnings (loss) per
    share                       0.48       0.83       1.33       1.63      (0.98)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    Weighted average
     shares outstanding    5,292,074  5,527,429  5,598,268  5,913,313  6,089,618
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
DILUTED INCOME (LOSS) PER
 SHARE:
   Earnings (loss) per
    share                      $0.47      $0.80      $1.26      $1.55     $(0.98)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
   Weighted average
    shares outstanding     5,462,425  5,728,549  5,891,357  6,216,794  6,089,618
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
 
<TABLE>
<CAPTION>
                                        As of December 31,
(in thousands)                1994     1995     1996     1997      1998
<S>                        <C>      <C>      <C>      <C>      <C>
-----------------------------------------------------------------------
 
CONSOLIDATED BALANCE
 SHEET DATA:
 
Working capital            $ 9,535  $12,446  $17,952  $28,128  $  4,268
Total assets                25,732   26,262   37,193   57,153   115,480
Long-term debt                  --       --       --       --        --
Stockholders' equity       $10,573  $14,882  $25,033  $36,140  $ 32,407
</TABLE>
 
8    Equity Marketing, Inc.

<PAGE>
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:
 
<TABLE>
<CAPTION>
                                     Year Ended December 31,
                                       1996    1997     1998
<S>                                  <C>     <C>     <C>
------------------------------------------------------------
 
Revenues                              100.0%  100.0%   100.0%
 
OPERATING EXPENSES:
   Cost of sales                       72.9%   73.8%    72.2%
   Provision for
    production-in-process losses         --%     --%     1.7%
   Salaries, wages and benefits         8.0%    7.3%     8.4%
   Selling, general and
    administrative                      8.9%    8.6%    12.9%
   Impairment of assets                  --%     --%     4.2%
   Restructuring                         --%     --%     2.6%
   Business process reengineering        --%     --%     1.4%
------------------------------------------------------------
    Total operating expenses           89.8%   89.7%   103.4%
------------------------------------------------------------
    Income (loss) from operations      10.2%   10.3%    (3.4)%
Other income, net                        .2%     .4%    (0.4)%
------------------------------------------------------------
    Income (loss) before provision
      (benefit) for income taxes       10.4%   10.7%    (3.8)%
Provision for income taxes              3.8%    4.1%      --%
------------------------------------------------------------
Net income (loss)                       6.6%    6.6%    (3.8)%
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
 
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
 
Revenues in 1998 increased $12,808 or 8.8% to $159,136 from $146,328 in 1997.
This increase was the result of increased revenues for both Promotions and
Consumer Products. Promotions' revenues increased $258 or 0.2% to $116,280 due
to a large promotion associated with Nickelodeon's The Rugrats Movie as well as
additional oil and gas promotion revenue generated subsequent to the acquisition
of CMI and USI. These increases were offset by slowed promotional activities in
Latin America and Asia due to those regions' weak economic conditions compared
to the corresponding period in the prior year. Revenues for the Consumer
Products division increased $12,550 or 41.4% to $42,856 from $30,306 primarily
due to sales of Headliners-Registered Trademark- product subsequent to the
acquisition of Corinthian.
 
Cost of sales increased $6,879, or 6.4% to $114,840 in 1998 (72.2% of revenues)
from $107,961 (73.8% of revenues) in 1997. This increase was due to increased
sales in 1998. Gross profit as a percentage of revenues increased slightly in
1998 from 1997 due primarily to a more profitable mix of revenues in 1998,
partially offset by write-downs on excess inventories of toys based on licenses
that the Company has decided not to renew for 1999.
 
The provision for production-in-process losses of $2,666 recorded in 1998
represents a write-off of tooling and development costs of consumer product
lines which the Company has decided to exit.
 
Salaries, wages and benefits increased $2,772, or 26.1% to $13,403 (8.4% of 
revenues). This increase was attributable to the full year impact of 
employees added throughout 1997, the addition of employees in the first half 
of 1998 and to the addition of employees from the acquisitions of Corinthian, 
CMI and USI.
 
Selling, general and administrative expenses increased $7,976, or 63.2% to
$20,587 (12.9% of revenues). This increase is due to increased depreciation and
amortization expense (increase of $775) associated with higher fixed asset
levels in 1998 and amortization of intangibles related to the acquisitions of
Corinthian in April 1998 and CMI and USI in July 1998. The increase is also
attributable to increased marketing costs for the consumer product lines
(increase of $2,930), increased commissions and other selling expenses
associated with the increase in sales (increase of $979), increased development
costs (increase of $1,383), increased occupancy costs for facilities to support
the higher number of employees (increase of $566) and increased bad debt expense
(increase of $1,343) in 1998.
 
                                                   Equity Marketing, Inc.      9

<PAGE>
The Company recorded a charge for impairment of assets of $6,712 for write-downs
associated with the impairment of the goodwill and other intangibles generated
by the Company's purchase of EPI Group Limited in 1996, as a result of that
subsidiary's loss of its major customer, as well as for write-offs of royalty
advances paid on long-term licenses the Company has decided to exit.
 
The Company recorded a restructuring charge of $4,121 in the fourth quarter of
1998. This charge is related to the Company's plans to exit the event-license
based consumer product business along with its retail pin business. This charge
reflects royalty guarantees yet to be paid on licenses the Company has exited or
is planning to exit as well as severance and other charges associated with staff
reductions and the pending closure of the Company's warehouse facility. For the
years ended December 31, 1997 and 1998 the total Consumer Product revenues from
the licenses that the Company has decided not to continue amounted to $28,807
and $30,046, respectively. For the years ended December 31, 1997 and 1998, the
cost of sales associated with these revenues totaled $20,412 and $23,657,
respectively.
 
Business process reengineering of $2,220 for the year ended December 31, 
1998, represents costs associated with the replacement of the Company's 
computer systems (see "INFORMATION SYSTEMS").
 
Income (loss) from operations decreased $20,538 or 135.8% to $(5,413) in 1998
((3.4)% of revenues) from $15,125 in 1997 (10.3% of revenues). This decrease is
attributable to the charges for business process reengineering, provision for
production-in-process losses, restructuring, and impairment of assets as well as
the increase in salaries, wages and benefits and selling, general and
administrative expenses in 1998.
 
The effective tax rate changed in 1998 to 0.01% from 38.5% in 1997. This change
is attributable primarily to the addition of non-deductible goodwill from the
purchase of Corinthian as well as to the write-down of non-deductible goodwill
related to EPI. This resulted in taxable income despite the loss recorded in
1998.
 
Net income (loss) decreased $15,616, or 162.3% to $(5,993) ((3.8) % of revenues)
in 1998 from $9,623 (6.6% of revenues) in 1997 primarily due to the factors
previously discussed.
 
Excluding the impact of restructuring charges, asset impairment charges, 
provisions for production-in-process losses and the business process 
reengineering costs related to replacement of its information systems 
incurred in 1998, the Company would have reported net income for 1998 of 
approximately $5,700, or $0.90 per diluted share.
 
The Company's plans to exit the event-license based consumer product business as
well as its write-downs of goodwill will have the effect of reducing future
salaries and wages and future goodwill amortization. These reductions, however,
will be offset by increased salaries and wages and goodwill amortization as a
result of the acquisitions of Corinthian, CMI and USI, which took place during
1998.
 
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
Revenues in 1997 increased $34,641 or 31.0% to $146,328 from $111,687 in 
1996. This increase was the result of increased revenues for both Promotions 
and Consumer Products. Promotions' revenues increased $23,210 or 25.0% to 
$116,022 due to large promotions associated with Universal's THE LOST WORLD: 
JURASSIC PARK and its home video feature THE LAND BEFORE TIME and Fox's 
ANASTASIA and due to increases in the number of both domestic and 
international promotions programs sold in 1997. Revenues for the Consumer 
Products division increased $11,431 or 60.6% to $30,306 due to sales 
associated with Universal's THE LOST WORLD: JURASSIC PARK and THE LAND BEFORE 
TIME, increases in sales under the Company's Warner Bros. international 
LOONEY TUNES license to design and manufacture products for sale to various 
international distributors and sales of products based on the PBS television 
property, WISHBONE.
 
Cost of sales increased $26,521 or 32.6% to $107,961 in 1997 (73.8% of revenues)
from $81,440 (72.9% of revenues) in 1996. This increase was due to higher sales
volume in 1997. Gross profit as a percentage of revenues decreased slightly in
1997 from 1996 due primarily to the sales mix, a greater percentage of Consumer
Products revenues offset by higher volume, lower margin Promotions sales due to
competitive pressures in 1997
 
Salaries, wages and benefits increased $1,754 or 19.8% to $10,631 (7.3% of
revenues) in 1997 from $8,877 (8.0% of revenues) in 1996. This increase is
attributable to the addition of approximately 23 employees plus the full year
effect of the 26 employees added in 1996.
 
10    Equity Marketing, Inc.

<PAGE>
Selling, general and administrative expenses increased $2,656 or 26.7% to 12,611
(8.6% of revenues) in 1997 from $9,955 (8.9% of revenues) due to (i) higher
sales commissions associated with the growth in the Consumer Products revenues
in 1997, (ii) increased telephone, postage, supplies and occupancy costs
associated with the increased number of employees and (iii) increased travel
costs associated with the Company's more aggressive sales efforts in 1997.
 
Income from operations increased $3,710 or 32.5% to $15,125 in 1997 (10.3% of
revenues) from $11,415 in 1996 (10.2% of revenues). This increase is
attributable to higher revenues, partially offset by higher salaries, wages and
benefits and higher selling, general and administrative expenses in 1997.
 
The effective tax rate in 1997 was 38.5% compared to the effective tax rate of
36.2% in 1996. The increase in the effective tax rate in 1997 was due primarily
to differences in the locations to which products were shipped in 1997, which
had the effect of increasing California state taxes.
 
Net income increased $2,180 or 29.3% to $9,623 (6.6% of revenues) in 1997 from
$7,443 (6.6% of revenues) in 1996 primarily due to the increases in revenues and
gross profit partially offset by increases in salaries, wages and benefits and
selling, general and administrative expenses and an increase in the effective
tax rate in 1997.
 
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 1998, the Company's investment in gross accounts receivable
increased $32,382 from the balance at December 31, 1997. This increase was
attributable to increased fourth-quarter revenues in 1998 and promotional
programs which shipped late in the fourth quarter of 1998. As of March 15, 1999,
a substantial portion of the receivables related to fourth quarter 1998
shipments had been collected. At December 31, 1998, inventory increased $4,459
over the balance at December 31, 1997, primarily as a result of a promotion
program which was scheduled to ship in early 1999 and as a result of increased
levels of consumer product inventories.
 
At December 31, 1998, accounts payable, accrued liabilities and due to 
customer increased $13,872, $10,590, and $6,572, respectively, from the prior 
year. The increase in accounts payable was primarily attributable to accounts 
payable to vendors associated with the manufacturing related to the large 
fourth-quarter promotional programs. The increase in accrued liabilities was 
attributable to increased accruals for payroll and royalties and to accruals 
for inventory purchase commitments, severance, royalty guarantees and lease 
commitments associated with the restructuring charge recorded in 1998. The 
increase in due to customers was attributable to significant contractual pass 
through costs associated with large fourth quarter promotional programs in 
1998.
 
At December 31, 1998, working capital was $4,268 as compared to $28,128 at
December 31, 1997. The decrease in working capital was primarily as a result of
cash used in the acquisitions of Corinthian, CMI and USI during 1998. The
decrease was also the result of cash used in the conversion to the new
information system and the related business process reengineering.
 
The Company believes that cash flow from on-going operations and amounts 
available under the credit facility will be sufficient to conduct its 
on-going operations in accordance with its current business plan through 
1999. See "CREDIT FACILITIES" and Note 8 of the accompanying Notes to 
Consolidated Financial Statements.
 
At December 31, 1998, the Company has commitments for guaranteed royalty and
advertising payments totaling $4,701 for the years ended December 31, 1999, 2000
and 2001. See Note 12 of the accompanying Notes to Consolidated Financial
Statements. The Company had no material commitments for capital expenditures at
December 31, 1998.
 
CREDIT FACILITIES
The Company maintains and periodically amends or replaces a credit agreement 
with two commercial banks that is utilized to finance the seasonal working 
capital requirements of its domestic and international operations. The credit 
facility is secured by substantially all of the Company's assets. In December 
1998, the credit agreement was amended to provide for availability of $40,000 
through January 31, 1999, $35,000 through March 31, 1999 and $30,000 through 
June 30, 2001. As of December 31, 1998, $30,000 was outstanding under this 
credit agreement. In addition, letter of credit amounts outstanding as of 
December 31, 1998 were $995. As of March 19, 1999 $5,000 was outstanding 
under the credit facility. Letters of credit outstanding as of March 19, 1999 
were $1,703. The credit agreement requires the Company to comply with certain 
financial covenants, including minimum tangible net worth, minimum current 
ratio, ratio of total liabilities to net worth, maximum funded debt coverage 
ratio, minimum fixed charge coverage ratio and net profit after taxes. As of 
December 31, 1998, the Company was out of compliance with certain of these 
covenants for which it has received a waiver from its banks. In connection 
with the waiver, the commitment under the Credit Agreement was amended to 
$25,000. The Company is currently in negotiations with its banks to amend 
certain provisions of the Credit Agreement. The Company has obtained a term 
sheet from the banks which proposes to amend certain of the financial 
covenants and other terms of the Credit Agreement (see Note 8 of the 
accompanying Notes to Consolidated Financial Statements). The Company is 
currently in compliance with the covenants included in the term sheet. The 
formal amendment to the Credit Agreement based upon the term sheet is subject 
to final credit approval of both banks and execution of definitive 
documentation. The Company believes it will be successful in obtaining final 
credit approval and finalizing the amendment. There can be no assurance, 
however, that the Company will be successful in obtaining such credit 
approval and finalizing the amendment under satisfactory terms. In this 
event, the Company believes it can obtain sufficient funding from other 
sources at terms satisfactory to the Company. Any failure by the Company to 
obtain sufficient funding on favorable terms could negatively impact the 
Company's business, financial condition, and results of operations.  The 
credit agreement also places restrictions on, among other things, the 
Company's capital expenditures, payment of dividends, stock repurchases, 
acquisitions, investments and transactions with affiliates.
 
                                                  Equity Marketing, Inc.      11

<PAGE>
INFLATION
The effect of inflation on the Company's operations during 1998 was
insignificant. The Company will continue its policy of controlling costs and
adjusting prices to the extent permitted by competitive factors.
 
INFORMATION SYSTEMS
 
IMPACT OF THE YEAR 2000 ISSUE INTRODUCTION.
 
The term "Year 2000 issue" is a general term used to describe the various 
problems that may result from the improper processing of dates and date 
sensitive calculations by computers and other machinery as the Year 2000 is 
approached and reached. These problems generally arise from the fact that 
most of the world's computer hardware and software have historically used 
only two digits to identify the year in a date, often meaning that the 
computer will fail to distinguish dates in the "2000's" from the dates in the 
"1900's." These problems may also arise from other sources as well, such as 
the use of special codes and conventions in software that makes use of the 
date field.
 
STATE OF READINESS.
 
The Company's primary focus has been on its own internal systems. To date, the
Company has completed the Year 2000 conversion with respect to its most critical
computer systems and applications, including its enterprise resource planning
system, computer networks and desktop applications. Based on strategic and
operational assessments, the Company decided to replace its existing information
systems in 1998. The new enterprise resource planning system is designed to
enhance management information, financial reporting, inventory management, order
entry and cost evaluation and control and has the added benefit of addressing
the Year 2000 issues. The new enterprise system went into operation in January
1999.
 
The Company is also communicating with suppliers, distributors, financial
institutions and others with which it does business to evaluate their Year 2000
compliance plans and state of readiness and to determine the extent to which the
Company will be affected by the failure of others to remediate their own Year
2000 issues. There can be no assurance that the systems of other companies on
which the Company's systems rely will also be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems. Failure to complete the system conversion in a timely manner
or any significant disruption of the Company's ability to communicate
electronically with its business partners could negatively impact the Company's
business, financial condition and results of operations. The statements set
forth herein are forward looking; and actual results may differ materially.
 
COSTS TO ADDRESS THE YEAR 2000 ISSUE.
 
The projects associated with the replacement of the enterprise resource planning
system are expected to cost approximately $4,600. For the year ended December
31, 1998, the Company spent a total of $4,264 on the conversion to the new
enterprise resource planning system, of which approximately $2,220 was spent on
business process reengineering. In accordance with Emerging Issues Task Force
Issue No. 97-13, such business process reengineering costs are expensed as
incurred. These expenses are presented as business process reengineering
expenses in the accompanying consolidated statements of operations. The
expenditures for hardware, software, and software implementation associated with
the conversion to the new system are capitalizable. For the year ended December
31, 1998, approximately $2,044 of these costs have been capitalized and are
reflected in fixed assets in the accompanying consolidated balance sheet.
 
Costs to address the Year 2000 issue affecting all other information systems is
relatively insignificant, with the majority of the work being performed by
Company employees.
 
CONTINGENCY PLANS.
 
Because the Company's Year 2000 conversion is expected to be completed prior to
any potential disruption to the Company's business, the Company has not yet
completed the development of a comprehensive Year 2000 specific contingency
plan. However, as part of its Year 2000 contingency effort, information received
from external sources is examined for date integrity before being brought into
the Company's internal systems. If the Company determines that its business or a
segment thereof is at a material risk of disruption due to the Year 2000 issue,
the Company will work to enhance its contingency plan.
 
12    Equity Marketing, Inc.
<PAGE>
CAUTIONARY STATEMENTS AND RISK FACTORS
In addition to the other information in this document, readers should carefully
consider the following cautionary statements and risk factors:
 
WE DEPEND ON ONE KEY CUSTOMER
 
Our success depends on a single customer, Burger King, which accounted for
69.5%, 67.3% and 62.7% of our revenues for the years ended December 31, 1996,
1997 and 1998, respectively. Burger King has no contractual commitment to do
business with us. There can be no assurance that Burger King will do business
with us in the future. The termination or a significant reduction by Burger King
of its business with us would adversely affect our business. See 'Business--
Equity Promotions' and Note 13 of Notes to Consolidated Financial Statements.
 
OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE
 
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
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.
 
THE SUCCESS OF OUR PRODUCTS DEPEND ON THE POPULARITY OF LICENSED MATERIALS
 
Our promotional 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 obtaining licenses and developing and manufacturing 
products prior to a release of the motion picture or television program upon 
which the products are based. Our customers, such as Burger King, typically 
require delivery schedules that coincide with the release of the underlying 
entertainment properties. 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. See "Business--Equity Promotions."
 
WE RELY ON A LIMITED NUMBER OF NONRENEWABLE PRODUCT ORDERS
 
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 for utilization in new promotional programs. 
See "Business--Equity Promotions." 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. There can be no assurance that any new retail product line will 
be successful. See "Business--Equity Consumer Products." The cancellation or 
premature termination of one or more retail product lines or promotional 
programs, because of our inability to renew or extend licenses (which 
typically have terms of three years or less) on favorable terms or otherwise, 
or a significant change in promotional practices within the fast-food 
restaurant industry, could have a material adverse effect on us. In addition, 
there can be no assurance that we or our customers will be able to secure 
licenses for additional entertainment properties on which to base our 
promotional and consumer products or that, if secured, such licenses will 
result in successful products.
 
OUR MARKETS ARE HIGHLY COMPETITIVE
 
The markets in which our businesses operate are highly competitive. Our
competitors 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.
 
                                                  Equity Marketing, Inc.      13

<PAGE>
WE RELY ON FOREIGN MANUFACTURERS
 
During 1998, approximately 98% of our products were manufactured at facilities
located in the Far East, and approximately 97% 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. China currently enjoys Most Favored Nation trading
status with the United States. China may not continue to enjoy Most Favored
Nation status in the future. In addition, over the last several years, the
United States has threatened to impose trade sanctions on Chinese products over
such issues as human rights, market access, and protection of United States
intellectual property rights. Any legislation or administrative action by the
United States government that revokes or places further conditions on China's
Most Favored Nation status, or otherwise limits imports of Chinese products into
the United States could adversely affect the demand for our products, because
products originating from China could be subjected to substantially higher rates
of duty.
 
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 whom we transact business may adversely affect
these entities' abilities to fulfill their obligations under their contracts.
 
THERE ARE RISKS ASSOCIATED WITH POTENTIAL 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. Furthermore, we may have to
incur debt or issue equity securities to pay for any future acquisitions or
investments, the issuance of which could be dilutive to our existing
stockholders.
 
WE MAY NEED ADDITIONAL CAPITAL
 
We require substantial working capital to fund our business. We may need to 
raise additional funds in the future. If we raise additional funds through 
the issuance of equity, equity-related or debt securities, such securities 
may have rights, preferences or privileges senior to those of the rights of 
our Common Stock and our stockholders may experience additional dilution. We 
cannot be certain that additional financing will be available to us on 
favorable terms when required, or at all. See "CREDIT FACILITIES" and Note 8 
of the accompanying Notes to Consolidated Financial Statements.
 
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS
 
Products that we develop or sell may expose us to liability from claims by 
users of such products. In addition, our products may be subject to a recall. 
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, or 
that such insurance will provide adequate coverage against all potential 
claims or for a product recall.
 
A SIGNIFICANT PORTION OF OUR COMMON STOCK IS CONTROLLED BY OUR OFFICERS AND
DIRECTORS
 
Donald A. Kurz and Stephen P. Robeck beneficially own approximately 25% and 19%,
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 and serves as a consultant to us. 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.
 
14    Equity Marketing, Inc.
<PAGE>
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. We have no current plans to issue shares of preferred
stock.
 
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 thus subject to market risk resulting from
interest rate fluctuations.
 
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 report of Arthur Andersen LLP dated March 30, 1999.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
None.
 
                                                  Equity Marketing, Inc.      15



<PAGE>
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.
 
<TABLE>
<CAPTION>
Name                                      Age                                  Position
<S>                                       <C>  <C>
---------------------------------------------------------------------------------------
Donald A. Kurz                             43  Chairman of the Board and Chief
                                               Executive Officer
Joseph F. Morrison                         55  President, Promotions and Consumer
                                               Products
Kim H. Thomsen                             46  Executive Vice President, Creative
                                               Director
Edward T. Boyd                             44  Senior Vice President, Worldwide
                                               Operations
Gaetano A. Mastropasqua                    34  Senior Vice President, Promotions
Leland P. Smith                            35  Senior Vice President, General Counsel
                                               and Secretary
Teresa P. Covington                        35  Vice President, Finance
Sanford R. Climan                          43  Director
Lawrence Elins                             51  Director
Mitchell H. Kurz                           47  Director
Bruce Raben                                45  Director
Stephen P. Robeck                          50  Director
</TABLE>
 
DONALD A. KURZ became 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.
 
JOSEPH F. MORRISON joined Equity Marketing in April 1998 with the acquisition of
Corinthian Marketing Inc., the creator and marketer of the popular
Headliners-Registered Trademark- collectible sports figurines. He was named
Equity Marketing's President of Promotions and Consumer Products in September
1998. Mr. Morrison is responsible for marketing, sales and overall profit center
management for Equity's non-Burger King promotions business, as well as all of
the company's consumer product lines. Mr. Morrison has more than 30 years'
experience in the advertising, marketing and entertainment fields. He was
previously Executive Vice President of marketing for Mattel, Inc. and an
executive for Wells, Rich & Greene, a leading advertising agency, where he
founded the firm's West Coast office and managed relationships with Proctor &
Gamble, Gallo Winery and other global packaged goods companies. Mr. Morrison
earned his bachelor's degree from Villanova University.
 
KIM H. THOMSEN joined Equity Marketing in 1991 and is currently responsible for
the creative direction for all of the company's promotions and consumer
products. Prior to joining Equity Marketing, she operated her own business as a
creative consultant. Ms. Thomson earned her bachelor's degree from Cornell
University.
 
EDWARD T. BOYD joined Equity Marketing in early 1998 and is responsible for all
product realization, including manufacturing, quality control and distribution.
He was previously a Senior Vice President of worldwide operations and sourcing
for Harman International Industries, a Vice President of operations for Mattel,
Inc., and Director of operations for Thomson Consumer Electronics. He holds a
bachelor's degree from the University of Portland and a master's degree in
international management from the American Graduate School of International
Management.
 
GAETANO A. MASTROPASQUA joined Equity Marketing in 1997 as a Senior Director
responsible for the company's Burger King account. He was promoted to his
current post in early 1999 and oversees the company's Burger King business while
also assisting with other promotional clients' activities. 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.
 
LELAND P. SMITH joined Equity Marketing in 1998 as Senior Vice President,
General Counsel and Secretary. He is responsible for the company's legal, human
resources, investor relations and office and board administration. Mr. Smith was
previously Assistant General Counsel for Mattel, Inc., and an associate in the
corporate department with Riordan & McKinzie. He holds a bachelor's degree from
Amherst College and a J.D. and a master's in business administration from the
University of Southern California.
 
16    Equity Marketing, Inc.
<PAGE>
TERESA P. COVINGTON joined Equity Marketing as Vice President of finance in
January 1999 and is responsible for the company's finance, accounting and
management information systems functions. She was previously Vice President of
operations for Harman International Industries, where she was responsible for
managing finance, accounting, quality assurance, human resources and other
activities. Ms. Covington also held several senior level operations and finance
positions at Mattel, Inc. She earned a bachelor's degree from the University of
Illinois, a master's degree in electrical engineering from the University of
Southern California and a master's in business administration from Stanford
Graduate School of Business.
 
SANFORD R. CLIMAN is currently pursuing private interests. 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 employed 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.
 
LAWRENCE ELINS is President of Elins Enterprises, a financial and real estate
investment company. He has been an Equity Marketing director since 1994 and was
formerly President of Applause, Inc., a toy and gift manufacturer. Mr. Elins
received his bachelor's degree from California State University, Northridge.
 
MITCHELL H. KURZ is 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 College 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.
 
BRUCE RABEN is a managing director with CIBC Oppenheimer, an investment banking
firm. 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. Mr. Raben is also a director of Terex Corp. and Optical
Security, Inc. 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. ROBECK has been an Equity Marketing director since 1989 and currently
serves 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.
 
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 1999 Annual Meeting of Stockholders, which
are incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to this item appears under the caption "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement relating to
the Company's 1999 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 captions "ELECTION OF
DIRECTORS" and "EXECUTIVE COMPENSATION AND RELATED MATTERS", in the Proxy
Statement relating to the Company's 1999 Annual Meeting of Stockholders, which
are incorporated herein by reference.
 
                                                  Equity Marketing, Inc.      17
<PAGE>
PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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
 
<TABLE>
<CAPTION>
                                                    Page
<S>                                                 <C>
                                                    ----
Report of Independent Public Accountants              19
CONSOLIDATED FINANCIAL STATEMENTS:
    Balance Sheets as of December 31, 1997 and
     1998                                             20
    Statements of Operations for the Years Ended
     December 31, 1996, 1997 and 1998                 21
    Statements of Stockholders' Equity for the
     Years Ended December 31, 1996, 1997 and 1998     22
    Statements of Cash Flows for the Years Ended
     December 31, 1996, 1997 and 1998                 23
Notes to Consolidated Financial Statements            24
Supplemental Schedule:
    Report of Independent Public Accountants
     on Schedule II                                   37
    Schedule II Valuation and Qualifying Accounts     38
</TABLE>
 
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 3, 1998 (Item 5).
 
    Report on Form 8-K filed with the Securities and Exchange Commission on May
    8, 1998 (Item 2).
 
    Report on Form 8-K/A filed with the Securities and Exchange Commission on
    July 8, 1998 (Item 2).
 
    Report on Form 8-K filed with the Securities and Exchange Commission on
    August 7, 1998 (Item 2).
 
    Report on Form 8-K filed with the Securities and Exchange Commission on
    September 29, 1998 (Item 5).
 
    Report on Form 8-K/A filed with the Securities and Exchange Commission on
    October 6, 1998 (Item 2).
 
    Report on Form 8-K filed with the Securities and Exchange Commission on
    December 16, 1998 (Item 5).
 
    Report on Form 8-K filed with the Securities and Exchange Commission on
    December 22, 1998 (Item 5).
 
18    Equity Marketing, Inc.



<PAGE>
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,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
 
                                         /s/ Arthur Andersen LLP
                                         Arthur Andersen LLP
 
Los Angeles, California
March 30, 1999
 
                                                  Equity Marketing, Inc.      19



<PAGE>
CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                               December 31,
(in thousands, except share and per
share data)                                   1997      1998
<S>                                       <C>       <C>
------------------------------------------------------------
 
ASSETS:
 
CURRENT ASSETS:
   Cash and cash equivalents               $ 8,935  $  7,250
   Accounts receivable (net of
    allowances of $600 and $3,684 as of
    December 31, 1997 and 1998,
    respectively)                           27,773    57,071
   Inventory                                 8,658    13,117
   Deferred income taxes                     1,146     4,331
   Prepaid expenses and other current
    assets                                   1,667     3,584
------------------------------------------------------------
        Total current assets                48,179    85,353
FIXED ASSETS, NET                            2,550     5,892
INTANGIBLE ASSETS, NET                       5,079    23,442
OTHER ASSETS                                 1,345       793
------------------------------------------------------------
        Total assets                       $57,153  $115,480
------------------------------------------------------------
------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
   Short-term debt                         $    --  $ 30,000
   Accounts payable                         14,560    28,432
   Due to customer                           2,100     8,672
   Accrued liabilities                       3,391    13,981
------------------------------------------------------------
        Total current liabilities           20,051    81,085
DEFERRED INCOME TAXES                           --       746
LONG-TERM LIABILITIES                          962     1,242
------------------------------------------------------------
        Total liabilities                   21,013    83,073
------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY:
   Preferred stock, $.001 par value per
    share, 1,000,000 shares authorized,
    none issued or outstanding                  --        --
   Common stock, par value $.001 per
    share, 20,000,000 shares authorized,
    6,010,103 and 6,227,718 shares
    outstanding as of December 31, 1997
    and 1998, respectively                      --        --
   Additional paid-in capital               13,371    15,343
   Retained earnings                        25,056    19,063
------------------------------------------------------------
                                            38,427    34,406
LESS --
   TREASURY STOCK, 1,892,841 SHARES AT
    COST AS OF DECEMBER 31, 1997 AND
    1998                                    (1,279)   (1,279)
   Stock subscription receivable               (43)      (32)
   Unearned compensation                      (965)     (688)
------------------------------------------------------------
        Total stockholders' equity          36,140    32,407
------------------------------------------------------------
        Total liabilities and
        stockholders' equity               $57,153  $115,480
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
20    Equity Marketing, Inc.


<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                           Years Ended December 31,
(in thousands, except share and per
share data)                               1996       1997       1998
<S>                                  <C>        <C>        <C>
--------------------------------------------------------------------
 
REVENUES                              $111,687   $146,328   $159,136
 
OPERATING EXPENSES:
   Cost of Sales                        81,440    107,961    114,840
   Provision for
    production-in-process losses            --         --      2,666
   Salaries, wages and benefits          8,877     10,631     13,403
   Selling, general and
    administrative                       9,955     12,611     20,587
   Impairment of assets                     --         --      6,712
   Restructuring                            --         --      4,121
   Business process reengineering           --         --      2,220
--------------------------------------------------------------------
        Total operating expenses       100,272    131,203    164,549
--------------------------------------------------------------------
        Income (loss) from
        operations                      11,415     15,125     (5,413)
 
OTHER (EXPENSE) INCOME:
   Interest expense                        (94)       (89)      (783)
   Interest income                         353        611        272
--------------------------------------------------------------------
        Income (loss) before
        provision for income taxes      11,674     15,647     (5,924)
PROVISION FOR INCOME TAXES               4,231      6,024         69
--------------------------------------------------------------------
    Net income (loss)                 $  7,443   $  9,623   $ (5,993)
--------------------------------------------------------------------
--------------------------------------------------------------------
 
BASIC INCOME (LOSS) PER SHARE:
    INCOME (LOSS) PER SHARE           $   1.33   $   1.63   $  (0.98)
--------------------------------------------------------------------
--------------------------------------------------------------------

    WEIGHTED AVERAGE SHARES
     OUTSTANDING                     5,598,268  5,913,313  6,089,618
--------------------------------------------------------------------
--------------------------------------------------------------------
 
DILUTED INCOME (LOSS) PER SHARE:
    INCOME (LOSS) PER SHARE           $   1.26   $   1.55   $  (0.98)
--------------------------------------------------------------------
--------------------------------------------------------------------

    WEIGHTED AVERAGE SHARES
     OUTSTANDING                     5,891,357  6,216,794  6,089,618
--------------------------------------------------------------------
--------------------------------------------------------------------

</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                                  Equity Marketing, Inc.      21
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                              Common Stock       Additional                                   Stock
(in thousands, except      ------------------       Paid-in    Retained    Treasury    Subscription        Unearned
share data)                   Shares   Amount       Capital    Earnings       Stock      Receivable    Compensation         Total
<S>                        <C>        <C>       <C>           <C>         <C>         <C>             <C>             <C>
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
 1995                      5,509,682      $--       $ 8,241     $ 7,990     $(1,285)          $ (64)          $  --       $14,882
   Net income                     --       --            --       7,443          --              --              --         7,443
   Issuance of shares
    pursuant to
    restricted stock plan     22,500       --           387          --          --              --            (387)           --
   Amortization of
    restricted stock
    plans                         --       --            --          --          --              --              22            22
   Issuance of treasury
    stock to 401(k) Tax
    Deferred Savings Plan     14,259       --           131          --           6              --              --           137
   Exercise of
    underwriters'
    warrants                 110,646       --           887          --          --              --              --           887
   Exercise of stock
    options                  175,000       --           739          --          --              --              --           739
   Tax benefit from
    exercise of stock
    options                       --       --           912          --          --              --              --           912
   Loan forgiveness               --       --            --          --          --              11              --            11
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
 1996                      5,832,087       --        11,297      15,433      (1,279)            (53)           (365)       25,033
   Net income                     --       --            --       9,623          --              --              --         9,623
   Issuance of shares
    pursuant to
    restricted stock plan     27,620       --           658          --          --              --            (658)           --
   Amortization of
    restricted stock
    grants                        --       --            --          --          --              --              58            58
   Exercise of
    underwriters'
    warrants                  61,968       --           467          --          --              --              --           467
   Exercise of stock
    options                   88,428       --           459          --          --              --              --           459
   Tax benefit from
    exercise of stock
    options                       --       --           490          --          --              --              --           490
   Loan forgiveness               --       --            --          --          --              10              --            10
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
 1997                      6,010,103       --        13,371      25,056      (1,279)            (43)            (965)      36,140
   Net loss                       --       --            --      (5,993)         --              --               --       (5,993)
   Issuance of shares
    pursuant to
    restricted stock plan     47,367       --           352          --          --              --             (352)          --
   Cancellation of shares
    pursuant to
    restricted Stock plan    (14,812)      --          (381)         --          --              --              381           --
   Amortization of
    restricted stock
    grants                        --       --            --          --          --              --              248          248
   Exercise of stock
    options                  175,000       --         1,191          --          --              --              --         1,191
   Issuance of stock to
    401(k) Tax Deferred
    Savings Plan              10,060       --            66          --          --              --              --            66
   Consulting services
    rendered in exchange
    for stock options             --       --           211          --          --              --              --           211
   Tax benefit from
    exercise of stock
    options                       --       --           533          --          --              --              --           533
   Loan forgiveness               --       --            --          --          --              11              --            11
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
 1998                      6,227,718      $--       $15,343     $19,063     $(1,279)           $(32)          $(688)      $32,407
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------

</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
22    Equity Marketing, Inc.



<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                             Years Ended December 31,
(in thousands)                              1996       1997      1998
<S>                                     <C>        <C>       <C>
----------------------------------------------------------------------
 
CASH FLOWS FROM OPERATING
 ACTIVITIES:
   Net income (loss)                    $  7,443   $  9,623   $ (5,993)
   Adjustments to reconcile net
    income (loss) to net cash
    provided by (used in) operating
    activities:
      Depreciation and amortization        1,079      1,247      2,022
      Provision for bad debts                361         92      1,435
      Tax benefit from exercise of
      stock options                          912        490        533
      Amortization of restricted
      stock                                   22         58        248
      Issuance of stock to 401(k)
      Tax Deferred Savings Plan              137          -         66
      Impairment of assets                     -          -      6,712
      Consulting services rendered
      in exchange for stock options            -          -        211
      Other                                   11         17         48
   Changes in assets and
    liabilities -
   Increase (decrease) in cash and
    cash equivalents
      Accounts receivable                (10,625)   (14,773)   (28,570)
      Inventory                               95     (3,943)    (2,814)
      Deferred income taxes                 (469)       (89)    (1,984)
      Prepaid expenses and other
      current assets                       2,194       (731)    (2,613)
      Other assets                          (441)        40        437
      Accounts payable                    (1,942)     9,676     11,554
      Accrued liabilities                 (2,622)      (779)    13,330
      Long-term liabilities                  219        (44)       280
----------------------------------------------------------------------
        Net cash provided by (used
        in) operating activities          (3,626)       884     (5,098)
----------------------------------------------------------------------
 
CASH FLOWS FROM INVESTING
 ACTIVITIES:
   Payment for purchase of EPI
    Group Limited                         (3,729)      (280)    (1,003)
   Payment for purchase of
    Corinthian Marketing, Inc. and
    Trademark                                 --         --     (8,436)
   Payment for purchase of Contract
    Marketing, Inc. and U.S. Import
    & Promotions Co.                          --         --    (15,088)
   Purchases of marketable
    securities                           (34,658)        --         --
   Proceeds from sales and
    maturities of marketable
    securities                            46,593         --         --
   Purchases of fixed assets                (773)    (1,097)    (4,366)
   Payment for purchase of Synergy
    minority interest                         --         --        (68)
----------------------------------------------------------------------
        Net cash provided by (used
        in) investing activities           7,433     (1,377)   (28,961)
----------------------------------------------------------------------
 
CASH FLOWS FROM FINANCING
 ACTIVITIES:
   Borrowings under line of credit        19,150     11,300     30,000
   Repayments on line of credit          (19,150)   (11,300)        --
   Repayment on EPI loan payable to
    bank                                  (1,000)        --         --
   Proceeds from exercise of stock
    options                                  739        459      1,191
   Proceeds from exercise of
    underwriters' warrants                   887        467         --
----------------------------------------------------------------------
        Net cash provided by
        financing activities                 626        926     31,191
----------------------------------------------------------------------
        Net increase (decrease) in
        cash and cash equivalents          4,433        433     (2,868)
Cash acquired in acquisitions                129         --      1,183
CASH AND CASH EQUIVALENTS,
 BEGINNING OF YEAR                         3,940      8,502      8,935
----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF
 YEAR                                    $ 8,502    $ 8,935   $  7,250
----------------------------------------------------------------------
----------------------------------------------------------------------
 
CASH PAYMENTS DURING YEAR FOR:
    Interest                             $   112    $    65   $    616
----------------------------------------------------------------------
----------------------------------------------------------------------
    Taxes                                $ 4,762    $ 4,399   $  2,143
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated statements
 
                                                  Equity Marketing, Inc.      23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 1998 (in thousands, except share and per share data)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), is a leading
provider of custom promotional products and services, and a developer of
distinctive, branded consumer products that complement the Company"s promotions
business. The Company primarily sells to customers in the United States (see
Note 13).
 
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.
 
Synergy Promotions S.A. de C.V. ("Synergy"), a Mexico corporation, is 100% owned
by the Company. Synergy markets the Company"s consumer products in Mexico. Prior
to June 1998, the Company owned 65% of Synergy. The Company acquired the 35%
minority interest in June 1998 for $68.
 
EPI Group Limited ("EPI"), a Delaware corporation, a designer, developer,
producer and distributor of promotional products for sale to oil companies,
consumer products companies and retailers. The Company acquired EPI in 1996 for
cash plus a commitment to pay additional cash consideration based on the results
of operations of the EPI business during the three year period ending December
31, 1999. In July 1998, the Company paid $1,003 to the former stockholders of
EPI as additional cash consideration in settlement of this commitment. This
amount was allocated to goodwill at that time (see Note 4). Effective January
15, 1999, EPI was dissolved.
 
In April 1998, the Company purchased 100% of the common stock of Corinthian
Marketing, Inc., a Delaware corporation ("Corinthian"). Corinthian is engaged
principally in the design, manufacture, marketing and distribution of the
Headliners brand of collectible sports figurines (see Note 5).
 
In July 1998, the Company acquired substantially all of the assets of Contract
Marketing, Inc. ("CMI"), a Massachusetts corporation, and U.S. Import and
Promotions Co. ("USI"), a Florida corporation (collectively referred to herein
as "CMI/ USI"). CMI/USI focuses primarily on promotions for oil and gas and
other retailers. The Company intends to continue to use the acquired assets for
this purpose. The primary operations of CMI/USI are located in West Boylston,
Massachusetts and St. Augustine, Florida (see Note 5).
 
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 generally accepted
accounting principles 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 amortized cost, which
approximates fair value as of December 31, 1997 and 1998.
 
REVENUE RECOGNITION
The Company records sales 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 Statement of
Financial Accounting Standards ("SFAS") No. 48.
 
24    Equity Marketing, Inc.
<PAGE>
INVENTORY
Inventory consists of production-in-process which represents direct costs
related to product development, procurement and tooling which are deferred and
amortized over the life of the products and purchased finished products held for
sale to customers and purchased finished products in transit to customers"
distribution centers. Inventory is stated at the lower of average cost or
market. As of December 31, 1997 and 1998, inventory consisted of the following:
 
<TABLE>
<CAPTION>
                                           December 31,
                                          ---------------
                                            1997     1998
<S>                                       <C>     <C>
                                          ---------------
Production-in-process                     $4,935  $ 2,140
Finished goods                             3,723   10,977
---------------------------------------------------------
                                          $8,658  $13,117
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
 
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization is provided on a
straight-line basis over estimated useful lives as follows:
 
        Leasehold improvements--Life of related lease 
        Furniture, fixtures, equipment and software--3-7 years
 
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, a trademark and other
intangibles related to the purchases of EPI, Corinthian, and CMI and USI. These
intangible assets are being amortized using the straight-line method over their
estimated useful lives ranging from 5 to 20 years. Accumulated amortization at
December 31, 1997 and 1998 was $406 and $670, respectively. For the years ended
December 31, 1996, 1997 and 1998, amortization expense amounted to $472, $422
and $932, respectively.
 
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of". This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The carrying value of existing assets are reviewed when events
or changes in circumstances indicate that an impairment test is necessary in
order to determine if an impairment has occurred. When factors indicate that
such assets should be evaluated for possible impairment, the Company will
estimate future cash flows expected to result from the use of the assets and
their eventual disposition, and compare the amounts to the carrying value of the
assets to determine if an impairment loss has occurred (see Note 4).

DUE TO CUSTOMER
Pursuant to the terms of certain contracts between the Company and a certain
promotions customer, the Company collects certain 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, 1997 and 1998, the amounts due to customer were
$2,100 and $8,672, 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. 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 11).
 
NET INCOME PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share" (EPS), effective for
the year ended December 31, 1997 and has restated its earnings per share
disclosure for the period ended December 31, 1996 to comply with SFAS No. 128.
Under SFAS No. 128, primary EPS is replaced by "Basic" EPS, which excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period.
"Diluted" EPS, which is computed similarly to fully diluted EPS, reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. When dilutive, stock
options are included as share equivalents in computing diluted earnings per
share using the treasury stock method. During a loss period, the assumed
exercise of in-the-money stock options and warrants has an antidilutive effect.
As a result, these shares are not included with the weighted average shares
outstanding of 6,089,618 used in the calculation of diluted loss per share for
the year ended December 31, 1998. The impact of including unexercised dilutive
options and warrants was to increase weighted average shares outstanding by
293,089 in 1996 and 303,481 in 1997. The impact of including dilutive options
and warrants (assuming net income) would have been to increase the weighted
average number of shares outstanding by 246,513 in 1998. Options to purchase
70,000, 268,000 and 1,115,101 shares of common stock were outstanding as of
December 31, 1996, 1997 and 1998, respectively and excluded from the computation
of diluted income per share as they would have been anti-dilutive.
 
                                                  Equity Marketing, Inc.      25
<PAGE>
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.
 
CONCENTRATION OF RISK
Accounts receivable represent unsecured balances due from its customers and the
Company is at risk to the extent such amounts become uncollectible. The Company
regularly extends credit to several distribution companies in connection with
its business with Burger King. One of these distribution companies accounts for
more than half of the products purchased for the Burger King system in any given
year. Failure by one or more distribution companies to honor their payment
obligations to the Company could have a material adverse effect on the Company"s
operations.
 
The Company purchases a significant portion of its manufactured products from
suppliers located outside the United States including China (97%). 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. China currently enjoys Most Favored Nation trading status with the
United States. No assurance can be given that China will continue to enjoy Most
Favored Nation status in the future. The Company believes that if these Chinese
suppliers were no longer available, it would be able to obtain its manufactured
products from existing suppliers located within the United States and suppliers
in foreign countries other than China. However, there can be no assurance that
the Company would be able to obtain manufactured products under acceptable
terms.
 
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. There are no adjustments to net income (loss) to
arrive at comprehensive income (loss).
 
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform them with the 1998 presentation.
 
2. RESTRUCTURING CHARGE

On December 21, 1998, the Company announced its decision to exit the
event-based-license consumer products business along with its retail pin
business. In connection with this decision, the Company recorded a restructuring
charge of $4,121.
 
The restructuring charge includes 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, of
which 15 have been terminated as of December 31, 1998, 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. The workforce reductions include employees from
the consumer products business, retail pin business, warehouse and other support
services. Excluding the warehouse employees, the workforce reductions are
expected to be completed by the end of the first quarter of 1999. The warehouse
is expected to be closed by the third quarter of 1999. The Company is in the
process of negotiating settlements on remaining minimum royalty guarantees with
licensors. These negotiations are expected to be completed by the end of the
second quarter of 1999. The amounts accrued reflect an estimate of the amounts
expected to be paid on these guarantees. Details of the restructuring charge are
as follows:
 
<TABLE>
<CAPTION>
                                                         Utilized      To Be
                                      Original Charge        1998   Utilized
<S>                                  <C>                <C>         <C>
                                     ---------------------------------------
Provision for projected minimum
 royalty guarantee shortfalls                  $2,187       $  --     $2,187
Employee severance and termination
 benefits                                         738        (127)       611
Outstanding inventory purchase
 commitments                                      800          --        800
Lease commitment for warehouse
 facility                                         396          --        396
----------------------------------------------------------------------------
                                               $4,121       $(127)    $3,994
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
 
26    Equity Marketing, Inc.
<PAGE>
For the year ended December 31, 1996, 1997 and 1998, the revenues generated in
the consumer products segment from licenses which the Company has decided not to
continue totaled $15,620, $28,807 and $30,046, respectively. For the years ended
December 31, 1996, 1997 and 1998, cost of sales associated with these revenues
totaled $11,945, $20,412 and $23,657, respectively.
 
3. PROVISION FOR PRODUCTION-IN-PROCESS LOSSES

The provision for production-in-process losses of $2,666 for the year ended 
December 31, 1998, represents a write-off of production-in-process associated 
with the activities which the Company has decided to exit.
 
4. IMPAIRMENT OF ASSETS

The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of". This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The carrying value of existing assets are reviewed when events
or changes in circumstances indicate that an impairment test is necessary in
order to determine if an impairment has occurred. When factors indicate that
such assets should be evaluated for possible impairment, the Company will
estimate future cash flows expected to result from the use of the assets and
their eventual disposition, and compare the amounts to the carrying value of the
assets to determine if an impairment loss has occurred.
 
During the fourth quarter of 1998, the Company"s EPI subsidiary lost its primary
customer, Shell Oil Company, as a result of that company"s merger with Texaco.
This loss triggered an impairment review of EPI"s long-lived assets, which
consist primarily of goodwill. Based on revised projections of EPI"s ongoing
business, the Company calculated the present value of expected cash flows to
determine the fair value of the assets. Accordingly, the Company recorded an
impairment charge of $5,520 for a write-down of the goodwill and other
intangibles associated with the EPI purchase. This charge is reflected in
impairment of assets in the accompanying consolidated statements of operations
and is reflected in the corporate segment (see Note 13). As of December 31,
1998, the remaining balance of the EPI goodwill was $300 and is being amortized
on a straight line basis over a period of five years.
 
In addition to the write-down of EPI goodwill, the Company realized an
impairment loss on certain assets associated with the activities which the
Company is exiting (see Note 2). Such impairment totaled $1,192 and are also
reflected in impairment of assets in the accompanying consolidated statements of
operations. Of this amount, approximately $1,095 represents an impairment of
royalty advances paid on long-term license agreements which the Company has
decided to discontinue and which will not be recouped against future sales. Such
impairment are reflected in the consumer products segment (see Note 13). The
remaining $97 reflects a impairment of capitalized costs associated with an
internet site associated with the retail pin business as well as an impairment
of warehouse leasehold improvements. Such impairments are reflected in the
corporate segment (see Note 13).
 
5. ACQUISITIONS

On April 24, 1998, the Company acquired 100% of the common stock of Corinthian
and certain trademarks related to its business, including the "Headliners"
trademark (the "Trademark"), from Corinthian Marketing PLC, for total cash
consideration of $7,892 plus related transaction costs of $544 at the closing.
Corinthian is engaged principally in the design, manufacture, marketing and
distribution of the Headliners brand of collectible sports figurines.
 
The Corinthian acquisition has been accounted for under the purchase method of
accounting. The financial statements reflect the preliminary allocations of the
purchase price and the assumption of liabilities and include the operating
results of Corinthian from the date of acquisition. The purchase price has been
preliminarily allocated to the assets acquired and liabilities assumed based on
their estimated fair values as of the acquisition date. As of December 31, 1998,
the excess of the purchase price over the estimated fair values of the net
assets acquired was $7,466 which has been recorded as goodwill and is being
amortized on a straight-line basis over 20 years. The Trademark has been valued
at $2,830 and is being amortized on a straight-line basis over 20 years. The
Company is in the process of finalizing valuations of the individual assets and
liabilities. The allocation of the excess purchase price may change based upon
these valuations.
 
On July 23, 1998 the Company acquired substantially all of the assets of CMI and
USI, in exchange for $14,659 plus related transaction costs of $429. Potential
additional cash consideration may be paid based upon the results of operations
of CMI/USI during each calendar year through December 31, 2002 as set forth in
the respective Asset Purchase Agreements, dated July 23, 1998, by and among the
Company and each of CMI and USI.
 
                                                  Equity Marketing, Inc.      27
<PAGE>
The CMI/USI acquisition has been accounted for under the purchase method of
accounting. The financial statements reflect the preliminary allocations of the
purchase price to the acquired net assets based on their estimated fair value as
of the acquisition date. As of December 31, 1998, the excess of the purchase
price over the estimated fair value of the net assets acquired was $13,465 which
has been recorded as goodwill and is being amortized on a straight line basis
over 20 years. The Company is in the process of finalizing valuations of the
individual assets. The allocation of the excess purchase price may change based
upon these valuations.
 
The preliminary allocation of the acquisition costs (based upon estimated fair
values) of Corinthian and CMI and USI was as follows:
 
<TABLE>
<S>                                                 <C>
Cash and cash equivalents                           $ 1,183
Accounts receivable                                   2,163
Inventory                                             1,645
Deferred taxes                                          340
Other current assets                                    398
Fixed assets                                            184
Trademark                                             2,830
Goodwill                                             20,931
Accounts payable                                     (2,318)
Accrued liabilities                                  (3,832)
-----------------------------------------------------------
                                                    $23,524
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
 
Deferred income taxes have been recorded for the basis differential of the
assets acquired between financial reporting purposes and tax reporting purposes.
 
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisitions of
Corinthian and CMI/USI had occurred at the beginning of each period presented
and includes pro-forma adjustments to give effect to the amortization of
goodwill, decreased interest income, increased interest expense associated with
funding the acquisitions, and certain other adjustments, together with the
related income tax effects. The pro forma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if the Company, Corinthian and CMI/USI had
been a single entity during 1997 and 1998, nor is it necessarily indicative of
the results of operations that may occur in the future.
 
<TABLE>
<CAPTION>
                                         Years Ended December 31,
                                         ------------------------
                                               1997         1998
                                              (UNAUDITED)
<S>                                       <C>          <C>
                                          -----------------------
Pro forma revenues                         $177,004      $166,752
Pro forma net income (loss)                $  9,271      $ (6,719)
Pro forma basic income (loss) per share    $   1.57      $  (1.10)
Pro forma diluted income (loss) per
 share                                     $   1.49      $  (1.10)
Pro forma basic weighted average shares
 outstanding                              5,913,313     6,089,618
Pro forma diluted weighted average
 shares outstanding                       6,216,794     6,089,618
</TABLE>
 
6. FIXED ASSETS, NET

Fixed assets, net is summarized as follows:
 
<TABLE>
<CAPTION>
                                            December 31,
                                          ----------------
                                             1997     1998
<S>                                       <C>      <C>
                                          ----------------
Furniture, fixtures and equipment         $ 1,660  $ 2,289
Computer software                             561    2,396
Computer hardware                           1,338    2,249
Leasehold improvements                        765    1,801
----------------------------------------------------------
    Fixed assets, at cost                   4,324    8,735
Accumulated depreciation and
 amortization                              (1,774)  (2,843)
----------------------------------------------------------
    Fixed assets, net                     $ 2,550  $ 5,892
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
 
28    Equity Marketing, Inc.
<PAGE>
For the years ended December 31, 1996, 1997 and 1998, depreciation and
amortization expense related to fixed assets was $607, $825 and $1,090
respectively.
 
7. INFORMATION SYSTEMS

Based on strategic and operational assessments, the Company decided to replace
its existing information systems. The new enterprise system is designed to
enhance management information, financial reporting, inventory management, order
entry and cost evaluation and control. The new enterprise system went into
operation in January 1999. These projects are expected to cost approximately
$4,600. For the year ended December 31, 1998, the Company has spent a total of
$4,264, of which approximately $2,220 was spent on business process
reengineering. In accordance with Emerging Issues Task Force Issue No. 97-13,
such business process reengineering costs are expensed as incurred. These
expenses are presented as business process reengineering expenses in the
accompanying consolidated statements of operations. The expenditures for
hardware, software, and software implementation associated with the conversion
to the new system are capitalizable. For the year ended December 31, 1998,
approximately $2,044 of these costs have been capitalized and are reflected in
fixed assets in the accompanying consolidated balance sheets.
 
8. LINE OF CREDIT

At December 31, 1997 and 1998, the Company was party to a revolving credit 
agreement ("Credit Agreement") with two commercial banks. Effective December 
10, 1998, the Credit Agreement was amended to increase the Company"s line of 
credit from $25,000 to $40,000. The amended credit facility matures on June 
30, 2001. Under the terms of the amended agreement, the Company"s available 
credit is reduced to $35,000 by January 31, 1999, and to $30,000 by March 31, 
1999. Interest on outstanding borrowings is based on either a fixed rate 
equivalent to Eurodollar plus 2.25 percent or a variable rate equivalent to 
the lead bank"s reference rate plus .25 percent. The Company is also required 
to pay an unused line fee of .25 percent per annum and certain letter of 
credit fees. The Credit Agreement is secured by substantially all of the 
Company"s assets. The Credit Agreement requires the Company to comply with 
certain financial covenants, including minimum tangible net worth, minimum 
current ratio, ratio of total liabilities to net worth, maximum funded debt 
coverage ratio, minimum fixed charge coverage ratio and net profit after 
taxes. The credit agreement also places restrictions on, among other things, 
the Company's capital expenditures, payment of dividends, stock repurchases, 
acquisitions, investments and transactions with affiliates. As of December 
31, 1998, the Company was out of compliance with certain of these covenants 
for which it has received waivers from its banks on March 30, 1999. In 
connection with the waiver, the commitment under the Credit Agreement was 
amended to $25,000. The Company is currently in negotiations with its banks 
to amend certain provisions of the Credit Agreement. The Company has obtained 
a term sheet from the banks which proposes to amend certain of the financial 
covenants under the Credit Agreement and also amend the rate of interest on 
borrowings to either a fixed rate equivalent to LIBOR plus 3 percent or a 
variable rate equivalent to the lead bank's reference rate plus .5 percent 
and amend the maturity of the Credit Agreement to March 31, 2000. The 
Company is currently in compliance with the covenants included in the term 
sheet. The formal amendment to the Credit Agreement based upon the terms in 
the term sheet is subject to final credit approval of both banks and 
execution of definitive documentation. The Company believes it will be 
successful in obtaining final credit approval and finalizing the amendment. 
There can be no assurance, however, that the Company will be successful in 
obtaining such credit approval and finalizing the amendment under 
satisfactory terms. In this event, the Company believes it can obtain 
sufficient funding from other sources at terms satisfactory to the Company. 
Any failure by the Company to obtain sufficient funding on favorable terms 
could negatively impact the Company's business, financial condition, and 
results of operations.
 
As of December 31, 1997 and 1998 there was zero and $30,000, respectively,
outstanding under the Credit Agreement. As of December 31, 1998, the weighted
average interest rate on all borrowings was 7.92%. Letters of credit amounts
outstanding as of December 31, 1997 and 1998 were $4,156 and $995, respectively.
 
9. 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 and
a discretionary amount determined each year by the Company and paid out of the
Company"s current or accumulated net profit. Costs related to contributions to
the 401(k) Plan for the years ended December 31, 1996, 1997, and 1998 were $107,
$137 and $154, respectively.
 
10. STOCKHOLDERS" EQUITY
 
STOCK OPTIONS
The Company has two stock option plans, the Employee Stock Option Plan (the
"Employee Plan") and the Non-Employee Director Stock Option Plan (the "Director
Plan"), together referred to as the "Option Plans". A total of 2,740,000 shares
of common stock are reserved for issuance, pursuant to options granted and to be
granted under these stock option plans. 1,071,689 shares are available for grant
as of December 31, 1998. Options pursuant to the Employee Plan vest over three
to five years and expire ten years from the date of grant. The Employee Plan
expires in 2001. Options 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.
 
                                                  Equity Marketing, Inc.      29
<PAGE>
Transactions involving the Option Plans are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                        Exercisable at End of Year
                                                  Weighted Average   --------------------------------
                                      Number of     Exercise Price                   Weighted Average
                                         Shares          Per Share         Shares      Exercise Price
<S>                                 <C>          <C>                 <C>            <C>
                                     ----------------------------------------------------------------
Outstanding at December 31, 1995      740,350              $4.59        334,708               $3.09
                                                                   ----------------------------------
   Granted                            340,000              16.04   ----------------------------------
   Exercised                         (175,000)              4.22
   Canceled                           (34,000)              5.88
----------------------------------------------------------------   ----------------------------------
Outstanding at December 31, 1996      871,350               9.08        322,350               $4.26
                                                                   ----------------------------------
   Granted                            438,000              24.09   ----------------------------------
   Exercised                          (88,428)              5.20
   Canceled                           (18,572)              9.13
----------------------------------------------------------------   ----------------------------------
Outstanding at December 31,  1997   1,202,350              14.84        429,778               $6.89
                                                                   ----------------------------------
   Granted                          1,111,917              15.58   ----------------------------------
   Exercised                         (175,000)              6.81
   Canceled                        (1,024,166)             19.84
----------------------------------------------------------------   ----------------------------------
Outstanding at December 31, 1998    1,115,101             $12.23        421,114              $11.52
----------------------------------------------------------------   ----------------------------------
----------------------------------------------------------------   ----------------------------------
</TABLE>
 
The following table summarizes information about the Company"s stock options
outstanding and exercisable as of December 31, 1998:
 
<TABLE>
<CAPTION>
                           
                                 Options Outstanding                                Options Exercisable
                           ------------------------------                     -----------------------------
                                         Weighted Average          Weighted                        Weighted
                                Number          Remaining           Average        Number           Average
Range of Exercise Prices   Outstanding   Contractual Life    Exercise Price   Exercisable    Exercise Price
<S>                        <C>           <C>                <C>               <C>           <C>
-----------------------------------------------------------------------------------------------------------
$0.32 - $7.21                  224,350               4.43             $3.27       212,778             $3.23
$7.50 - $12.25                 455,417               4.17             $7.77        19,000            $11.33
$13.13 - $20.75                297,000               8.52            $18.68       121,000            $17.40
$22.25 - $28.13                138,334               8.97            $27.55        68,336            $26.96
-----------------------------------------------------------------------------------------------------------
                             1,115,101               5.98            $12.23       421,114            $11.52
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------

</TABLE>
 
On December 14, 1998, the Company permitted option holders to exchange their
outstanding stock options for a lesser number of options priced at fair market
value on that date, $7.50. Options with an exercise price greater than $20.00 a
share were eligible to be exchanged for options priced at $7.50 with a 50%
reduction in the number of options, and options with an exercise price less than
or equal to $20.00 a share were eligible to be exchanged for options priced at
$7.50 with a 33% reduction in the number of options. Each replacement grant
retained the original grant"s vesting schedule but imposed a one year moratorium
on exercise. Twenty-one employees and consultants of the Company elected to
participate, exchanging an aggregate of options to purchase 817,500 shares of
Common Stock at exercise prices ranging from $12.25 to $28.13 a share in return
for an aggregate of options to purchase 422,417 shares of Common Stock at an
exercise price of $7.50 per share. Donald A. Kurz and Stephen P. Robeck, the
Company"s co-chief executive officers, were not eligible to participate in the
exchange.
 
30    Equity Marketing, Inc.



<PAGE>
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. 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. 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 (in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                      Years Ended December
                                               31,
                                     -----------------------
                                       1996    1997     1998
                                     -----------------------
<S>                                  <C>     <C>     <C>
Net income (loss)--as reported       $7,443  $9,623  $(5,993)
Net income (loss)--pro forma         $6,919  $8,138  $(9,672)
Basic earnings (loss) per share-as
 reported                            $ 1.33  $ 1.63  $  (.98)
Basic earnings (loss) per share-pro
 forma                               $ 1.24  $ 1.38  $ (1.59)
Diluted earnings (loss) per
 share-as reported                   $ 1.26  $ 1.55  $  (.98)
Diluted earnings (loss) per
 share-pro forma                     $ 1.17  $ 1.31  $ (1.59)
</TABLE>
 
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:
 
<TABLE>
<CAPTION>
                                      Years Ended December 31,
                                     -------------------------
                                       1996    1997    1998
                                     -------------------------
<S>                                  <C>      <C>      <C>
Expected dividend yield                0.00%    0.00%    0.00%
Expected stock price volatility       61.91%   65.73%   69.97%
Risk free interest rate                6.00%    5.53%    4.41%
Expected life of options             3 years  3 years  3 years
</TABLE>
 
The weighted average fair value of options granted during 1997 and 1998 is
$24.09 and $7.28, respectively.
 
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 are to vest through March 2001. None of 
these options have been exercised. 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 approximately 16,000 shares of 
common stock have vested as of December 31, 1998. In 1998, the Company has 
recorded compensation expense of approximately $211 related to these options.
 
WARRANTS
At December 31, 1998, there were 4,131 underwriters" warrants outstanding
relating to the Company"s initial public offering, which are exercisable at
$8.02 per share. The warrants expire on January 31, 1999.
 
PREFERRED STOCK
The Company has authorized 1,000,000 shares of preferred stock, par value $.001
per share ("Preferred Stock"). The Board of Directors is empowered to issue
Preferred Stock from time to time in one or more series, without stockholder
approval, and to determine the rights, preferences and restrictions, including
dividend, conversion, voting, redemption (including sinking fund provisions),
and other rights, liquidation preferences and the number of shares constituting
any series and the designations of such series. To date, no series of Preferred
Stock has been issued.
 
STOCK SUBSCRIPTION RECEIVABLE
On September 27, 1991, a minority stockholder of the Company purchased 1,850,000
shares of the Company"s treasury stock for an aggregate purchase price of $107.
Since the stock was sold below cost, the loss on the issuance of the treasury
stock was charged to retained earnings.
 
The purchase price for these shares was paid with promissory notes, payable in
ten years, together with interest at an annual rate of 8.41% per year on the
unpaid principal balance. The notes are subject to the terms of the Loan
Forgiveness Agreements dated September 27, 1991, pursuant to which the principal
amount of the notes will be forgiven
 
                                                  Equity Marketing, Inc.      31
<PAGE>
at 10% per year, provided that the stockholder remains employed by the Company
at such time. The stock subscription receivable is included in the accompanying
consolidated balance sheets as a reduction of stockholders" equity. The Company
records the annual reduction as compensation expense.
 
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 year ended, December
31, 1998, 47,367 shares with an aggregate market value on the date of grant of
$352 were issued 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. The unearned
compensation is shown as a reduction of shareholders" equity in the accompanying
consolidated balance sheets and is being amortized ratably over the restricted
period. Compensation charged to expense was $22, $58 and $248 in 1996, 1997 and
1998, respectively. At December 31, 1998, 17,325 shares were available for
issuance under the Plan.
 
11. INCOME TAXES
 
In accordance with SFAS 109, 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 provisions for income taxes consist of:
 
<TABLE>
<CAPTION>
                                      Years Ended December 31,
                                      ------------------------
                                       1996     1997      1998
                                      ------------------------
<S>                                  <C>      <C>      <C>
CURRENT:
Federal                              $2,045   $4,713    $1,266
State and local                         264      728       175
--------------------------------------------------------------
                                      2,309    5,441     1,441
--------------------------------------------------------------
 
DEFERRED:
Federal                                 920       84    (1,673)
State and local                          90        9      (232)
--------------------------------------------------------------
                                      1,010       93    (1,905)
--------------------------------------------------------------
Additional paid-in capital from
 benefit of stock options exercised     912      490       533
--------------------------------------------------------------
                                     $4,231   $6,024       $69
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
 
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.
 
<TABLE>
<CAPTION>
                                       Years Ended December 31,
                                       ------------------------
                                        1996     1997     1998
                                      -------------------------
<S>                                   <C>      <C>      <C>
Tax at the Federal statutory rate     $3,986   $5,476   $(2,014)
State income taxes, net of the
 Federal tax benefit                     267      597      (170)
Municipal bond interest not subject
 to Federal or State taxes               (49)      --        --
Other                                     27      (49)    2,253
---------------------------------------------------------------
                                      $4,231   $6,024       $69
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
 
Other reflects the effects of permanent differences such as amortization of
goodwill and the write-off of the EPI goodwill in 1998.
 
32    Equity Marketing, Inc.
<PAGE>
The tax effects of the significant temporary differences giving rise to the
Company"s deferred tax assets (liabilities) for the years ended December 31,
1997 and 1998 are as follows:
 
<TABLE>
<CAPTION>
                                            1997     1998
                                          ---------------
<S>                                       <C>     <C>
Allowance for doubtful accounts           $  228  $ 1,411
Inventory Reserve                            327      895
Accrued expenses                             573    1,889
Other                                         18      136
---------------------------------------------------------
   Total current                           1,146    4,331

Trademark                                     --   (1,035)
Depreciation                                 115      289
---------------------------------------------------------
   Total non-current                         115     (746)

Total                                     $1,261  $ 3,585
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
 
As of December 31, 1997, non-current deferred tax assets were included in other
assets in the accompanying consolidated balance sheets.
 
12. COMMITMENTS AND CONTINGENCIES
 
OPERATING LEASES
The Company has operating leases for its properties, which expire at various
dates through 2007.
 
Future minimum lease payments under non-cancelable operating leases are as 
follows:
 
<TABLE>
<CAPTION>
Year
<S>                                                 <C>
-----------------------------------------------------------
1999                                                $ 2,736
2000                                                  2,432
2001                                                  2,099
2002                                                  2,108
2003                                                  2,120
Thereafter                                            4,952
-----------------------------------------------------------
                                                     16,447
Less sublease income                                 (6,063)
-----------------------------------------------------------
Total                                               $10,384
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
 
Aggregate rental expenses for operating leases was $1,007, $1,069 and $1,235 for
the years ended December 31, 1996, 1997, and 1998, respectively.
 
GUARANTEED ROYALTIES
For the years ended December 31, 1996, 1997, and 1998, the Company incurred
$3,273, $3,761 and $6,149, 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, 1998, the
Company was committed to pay total minimum guaranteed royalties as follows:
 
<TABLE>
<CAPTION>
Year
<S>                                                 <C>
-----------------------------------------------------------
1999                                                 $1,537
2000                                                  1,276
2001                                                  1,888
-----------------------------------------------------------
Total                                                $4,701
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
 
Included in the above commitments are projected minimum guarantee shortfalls of
$2,187 which have been accrued as of December 31, 1998 (see Note 2).
 
                                                  Equity Marketing, Inc.      33
<PAGE>
EMPLOYMENT AGREEMENTS
 
The Company has employment agreements with several key executives. Guaranteed
compensation under these agreements is as follows:
 
<TABLE>
<CAPTION>
Year
<S>                                                 <C>
-----------------------------------------------------------
1999                                                 $2,206
2000                                                  1,622
2001                                                    885
2002                                                    375
-----------------------------------------------------------
Total                                                $5,088
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
 
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings generally incidental to its
business. While the result of any litigation contains an element of uncertainty,
management presently believes that the outcome of any known, pending or
threatened legal proceeding or claim, individually or combined, will not have a
material adverse effect on the Company"s financial position or results of
operations.
 
13. 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 69%, 67% and 63% of the Company"s
revenues for the years ended December 31, 1996, 1997 and 1998, respectively,
were from one customer in the promotional 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: promotions and consumer products. The factors for
determining the reportable segments were based on the distinct nature of their
operations. They are managed as separate business units because each requires
and is responsible for executing a unique business strategy. The promotions
segment produces promotional products used as free premiums or sold in
conjunction with the purchase of other items at a retailer or quick service
restaurant. Promotional products are used for marketing purposes by both the
companies sponsoring the promotions and the licensors of the entertainment
properties on which the promotional products are based. The consumer products
segment designs and contracts for the manufacture of toys and other consumer
products for sale to major mass market retailers, who in turn sell the products
to consumers.
 
Earnings of industry segments and geographic areas exclude interest income,
interest expense, depreciation and amortization expense, 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. Corporate assets consist of cash, certain corporate receivables,
fixed assets, and intangibles.
 
34    Equity Marketing, Inc.
<PAGE>
INDUSTRY SEGMENTS
 
<TABLE>
<CAPTION>
                                         As of and For the Year Ended December 31, 1996
                                ----------------------------------------------------------------
                                 Promotions    Consumer Products       Corporate           Total
                                ----------------------------------------------------------------
<S>                             <C>           <C>                  <C>             <C>
Total revenues                      $92,812              $18,875         $    --        $111,687
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Income (loss) before provision
 (benefit) for income taxes         $19,010              $ 1,677         $(9,013)       $ 11,674
Provision (benefit) for income
 taxes                                6,843                  604          (3,216)          4,231
------------------------------------------------------------------------------------------------
Net income (loss)                   $12,167              $ 1,073         $(5,797)       $  7,443
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Fixed asset additions, net          $    --              $    --         $   773        $    773
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Depreciation and amortization       $    --              $    --         $ 1,079        $  1,079
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Total assets                        $28,220              $ 5,295         $ 3,678        $ 37,193
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
 
<TABLE>
<CAPTION>
                                         As of and For the Year Ended December 31, 1997
                                ----------------------------------------------------------------
                                 Promotions    Consumer Products       Corporate           Total
                                ----------------------------------------------------------------
<S>                             <C>           <C>                  <C>             <C>
Total revenues                     $116,022              $30,306         $    --        $146,328
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Income (loss) before provision
 (benefit) for income taxes        $ 21,300              $ 3,733         $(9,386)       $ 15,647
Provision (benefit) for income
 taxes                                8,201                1,437          (3,614)          6,024
------------------------------------------------------------------------------------------------
Net income (loss)                  $ 13,099              $ 2,296         $(5,772)       $  9,623
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Fixed asset additions, net         $     --              $    --         $ 1,097        $  1,097
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Depreciation and amortization      $     --              $    --         $ 1,247        $  1,247
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Total assets                       $ 15,989              $ 7,811         $33,353        $ 57,153
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
 
<TABLE>
<CAPTION>
                                         As of and For the Year Ended December 31, 1998
                                ----------------------------------------------------------------
                                 Promotions    Consumer Products       Corporate           Total
                                ----------------------------------------------------------------
<S>                             <C>           <C>                  <C>             <C>
Total revenues                     $116,280              $42,856        $     --        $159,136
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Income (loss) before provision
 (benefit) for income taxes        $ 22,766              $(6,725)       $(21,965)       $ (5,924)
Provision (benefit) for income
 taxes                                8,717               (2,575)         (6,073)             69
------------------------------------------------------------------------------------------------
Net income (loss)                  $ 14,049              $(4,150)       $(15,892)       $ (5,993)
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Fixed asset additions, net         $     --              $    --        $  4,366        $  4,366
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Depreciation and amortization      $     --              $    --        $  2,022        $  2,022
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Total assets                       $ 55,597              $13,580        $ 46,303        $115,480
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
 
Information about the Company"s operations by geographical area is as follows:
 
<TABLE>
<CAPTION>
                                       As of and For the Years
                                          Ended December 31,
                                     ----------------------------
                                         1996      1997      1998
                                     ----------------------------
<S>                                  <C>       <C>       <C>
REVENUES:
   United States                     $ 99,878  $117,521  $138,571
   International                       11,809    28,807    20,565
-----------------------------------------------------------------
   Total revenues                    $111,687  $146,328  $159,136
-----------------------------------------------------------------
-----------------------------------------------------------------
 
INCOME (LOSS) FROM OPERATIONS:
   United States                     $ 10,873  $ 12,316  $(10,669)
   International                          542     2,809     5,256
-----------------------------------------------------------------
   Total operating income (loss)     $ 11,415  $ 15,125  $ (5,413)
-----------------------------------------------------------------
-----------------------------------------------------------------

FIXED ASSETS, NET:
   United States                       $2,153    $2,432    $5,736
   International                          132       118       156
-----------------------------------------------------------------
   Total fixed assets                  $2,285    $2,550    $5,892
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
 
                                                  Equity Marketing, Inc.      35
<PAGE>
14. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                               Three Months Ended
                                ------------------------------------------------
                                 March 31    June 30  September 30   December 31
                                ------------------------------------------------
<S>                             <C>        <C>        <C>            <C>
1997
Revenues                          $21,618    $46,638       $27,588       $50,484
Income from operations            $ 1,754    $ 5,489       $ 2,114       $ 5,768
Net income                        $ 1,142    $ 3,408       $ 1,448       $ 3,625
 
BASIC INCOME PER SHARE:
   Earnings per share             $  0.20    $  0.57       $  0.24       $  0.61
   Weighted average shares
    outstanding                 5,848,266  5,927,055     5,956,307     5,966,398
 
DILUTED INCOME PER SHARE:
   Earnings per share             $  0.19    $  0.55       $  0.23       $  0.57
   Weighted average shares
    outstanding                 6,152,751  6,203,964     6,289,128     6,318,001
</TABLE>


 
<TABLE>
<CAPTION>
                                               Three Months Ended
                                ------------------------------------------------
                                 March 31    June 30  September 30   December 31
                                ------------------------------------------------
<S>                             <C>        <C>        <C>            <C>
1998
Revenues                          $23,796    $30,593       $29,987       $74,760
Income (loss) from operations     $   862    $ 2,456       $  (821)      $(7,911)
Net income (loss)                 $   616    $ 1,565       $  (700)      $(7,474)
 
BASIC INCOME (LOSS) PER SHARE:
   Earnings (loss) per share      $  0.10    $  0.26       $ (0.12)      $ (1.20)
   Weighted average shares
    outstanding                 6,010,103  6,035,066     6,085,585     6,227,718
 
DILUTED INCOME (LOSS) PER
 SHARE:
   Earnings (loss) per share      $  0.10    $  0.25       $ (0.12)      $ (1.20)
   Weighted average shares
    outstanding                 6,314,902  6,315,415     6,085,585     6,227,718
</TABLE>
 
 
36    Equity Marketing, Inc.

<PAGE>

                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Equity Marketing, Inc.:

     We have audited in accordance with generally accepted auditing 
standards, the consolidated financial statements of Equity Marketing, Inc. 
and Subsidiaries included in this Report on Form 10-K and have issued our 
report thereon dated March 30, 1999. Our audit was made for the purpose of 
forming an opinion on the basic financial statements taken as a whole. The 
accompanying schedule 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 audit 
of the basic 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 financial statements taken as a whole.

                                       /s/ ARTHUR ANDERSEN LLP
                                       ARTHUR ANDERSEN LLP

Los Angeles, California
March 30, 1999


                                                  Equity Marketing, Inc.      37
<PAGE>

                                                                     SCHEDULE II
 
                             EQUITY MARKETING, INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           Additions       Additions
                                     Balance at           Charged to      Charged to                          Balance at
Classification              Beginning of Period    Operating Expenses       Revenues     Deductions,net    End of Period
-------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                    <C>                    <C>             <C>              <C>
YEAR ENDED DECEMBER 31,
 1996
   Allowances for
    doubtful accounts
    receivable and sales
    returns                                $200               $ 361          $  440          $ (446)(A)           $ 555
 
YEAR ENDED DECEMBER 31,
 1997
   Allowances for
    doubtful accounts
    receivable and sales
    returns                                $555               $  92          $  807          $ (854)(A)           $ 600
 
YEAR ENDED DECEMBER 31,
 1998
   Allowances for
    doubtful accounts
    receivable and sales
    returns                                $600              $1,435          $3,734          $(2,085)(A)           $3,684
Restructuring Reserves                     $ --              $4,121          $   --          $  (127)              $3,994
</TABLE>
 
(A) Represents product returns, credits applied, and accounts receivable 
    written off, net of recoveries.

38     Equity Marketing, Inc.
<PAGE>

                                   SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles
and State of California on the 30th day of March, 1999.
 
<TABLE>
<S>                             <C>  <C>
                                EQUITY MARKETING, INC.
 
                                By:              /s/ DONALD A. KURZ
                                     ------------------------------------------
                                                   Donald A. Kurz
                                     CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
                                                      OFFICER
</TABLE>
 
                                POWER OF ATTORNEY
We, the undersigned directors and officers of Equity Marketing, Inc. do hereby
severally constitute and appoint Donald A. Kurz, Leland P. Smith and Teresa P.
Covington, 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.
 
<TABLE>
<CAPTION>
             Name                         Title                    Date
------------------------------  --------------------------  -------------------
<C>                             <S>                         <C>
                                Chairman of the Board and
      /s/ DONALD A. KURZ          Chief Executive Officer
------------------------------    (Principal Executive        March 30, 1998
        Donald A. Kurz            Officer)
 
   /s/ TERESA P. COVINGTON      Vice President, Finance
------------------------------    (Principal Financial and    March 30, 1998
     Teresa P. Covington          Accounting Officer)
 
    /s/ SANFORD R. CLIMAN
------------------------------  Director                      March 30, 1998
      Sanford R. Climan
 
      /s/ LAWRENCE ELINS
------------------------------  Director                      March 30, 1998
        Lawrence Elins
 
       /s/ BRUCE RABEN
------------------------------  Director                      March 30, 1998
         Bruce Raben
 
    /s/ STEPHEN P. ROBECK
------------------------------  Director                      March 30, 1998
      Stephen P. Robeck
 
------------------------------  Director
       Mitchell H. Kurz
</TABLE>
 
                                                     Equity Marketing, Inc.  39

<PAGE>
 
<TABLE>
<CAPTION>
Exhibit   Description                                   Page
------------------------------------------------------------
<C>       <S>                                       <C>
    3.1   Certificate of Incorporation. (4)               --
    3.2   Amended and Restated Bylaws. (7)                --
   10.1   Amended and Restated Credit Agreement
          dated December 10, 1998 between Equity
          Marketing, Inc., Sanwa Bank California,
          and Imperial Bank. (8)                          --
   10.2   Agreement of lease dated April 12, 1995
          between Rodeo Wilshire Realty, Inc. and
          Equity Marketing, Inc. (3)                      --
   10.3   Agreement of Lease, dated January 3,
          1995, between Wide Harvest Investment
          Ltd. and Equity Marketing Hong Kong,
          Ltd. (2)                                        --
   10.4   Form of Representative's Warrant
          Agreement between Equity Marketing, Inc.
          and Josephthal, Lyon & Ross
          Incorporated. (1)                               --
   10.5   Form of Indemnification Agreement
          between Equity Marketing, Inc. and
          Josephthal, Lyon & Ross Incorporated.
          (1)                                             --
   10.6   Promissory Notes, dated September 27,
          1991, issued by Donald A. Kurz to Equity
          Marketing, Inc. (1)                             --
   10.7   Loan Forgiveness Agreements, dated
          September 27, 1991, between Equity
          Marketing, Inc. and Donald A. Kurz. (1)         --
   10.8   Tax indemnification Agreement, dated
          October 1, 1993, among Stephen P.
          Robeck, Donald A. Kurz and Equity
          Marketing, Inc. (1)                             --
   10.9   Reimbursement Agreement, dated October
          1, 1993, among Donald A. Kurz, Stephen
          P. Robeck and Equity Marketing, Inc. (1)        --

  10.10   Agreement of Lease dated July 17, 1998,
          between Miracle Mile, L.L.C., and
          Equity Marketing, Inc. (8)                      --

  10.11   First Amendment and Waiver to Amended and
          Restated Credit Agreement dated March 30,
          1998, by and among Sanwa Bank California,
          Imperial Bank and Equity Marketing, Inc. (8)    --

          EXECUTIVE COMPENSATION PLANS AND
          ARRANGEMENTS OF THE COMPANY

  10.12   Form of Director's and Officer's
          Indemnification Agreement. (7)                  --
  10.13   Equity Marketing, Inc. Deferred
          Compensation Plan. (4)                          --
  10.14   Equity Marketing, Inc. Amended and
          Restated Stock Option Plan. (7)                 --
  10.15   Equity Marketing Inc. Non-Employee
          Director Stock Option Plan. (6)                 --
  10.16   Employment agreement dated January 1,
          1999 between Equity Marketing, Inc. and
          Donald A. Kurz. (8)                             --
  10.17   Consulting agreement dated January 1,
          1999 between Equity Marketing, Inc. and
          Stephen P. Robeck. (8)                          --
  10.18    Employment agreement dated August 5,
          1996 between Equity Marketing, Inc. and
          Albert R. Ovadia. (5)                           --
  10.19   Amended and Restated Employment
          agreement dated September 1, 1998
          between Equity Marketing, Inc. and
          Joseph F. Morrison. (8)                         --
  10.20   Employment Agreement dated April 13,
          1998 between Equity Marketing, Inc. and
          Edward Boyd. (8)                                --
    21.   Subsidiaries of the Registrant.
    23.   Consent of Arthur Andersen LLP.
    27.   Financial Data Schedule.
</TABLE>
 
------------------------
(1) Previously filed as an exhibit to the Registrant's Registration Statement on
    Form S-1 (Registration Statement No.
   33-67778), which is incorporated herein by reference.
 
(2) Previously filed as an exhibit to the Registrant's Statement of Form 10-K
    for the year ended December 31, 1994, which is incorporated herein by
    reference.
 
(3) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
    for the quarter ended March 31, 1995, which is incorporated herein by
    reference.
 
(4) Previously filed as an exhibit to the Registrant's Statement on Form 10-K
    for the year ended December 31, 1995, which is incorporated herein by
    reference.
 
(5) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
    for the quarter ended September 30, 1996, which is incorporated herein by
    reference.
 
(6) Previously filed as an exhibit to the Registrant's Statement on Form 10-K
    for the year ended December 31, 1997, which is incorporated herein by
    reference.
 
(7) Previously filed as an exhibit to the Registrant's Statement on Form 10-Q
    for the quarter ended September 30, 1998, which is incorporated herein by
    reference.
 
(8) To be filed on a Current Report on Form 8-K.
 
                                                  Equity Marketing, Inc.      39