UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2004

or

Commission File Number: 23346

EMAK WORLDWIDE, INC.

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

Equity Marketing, Inc.
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Common Stock, $.001 par value, 5,758,888 shares as of November 11, 2004.

EMAK WORLDWIDE, INC.

Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
September 30, 2004

Cautionary Statement

Certain expectations and projections regarding our future performance discussed in this quarterly report are forward-looking and are made under the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These expectations and projections are based on currently available competitive, financial and economic data along with our operating plans and are subject to future events and uncertainties. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Actual results could vary materially from those anticipated for a variety of reasons. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are advised to review “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Statements and Risk Factors.”

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EMAK WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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EMAK WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

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

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EMAK WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

5

EMAK WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

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EMAK WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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EMAK WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

NOTE 1 — ORGANIZATION AND BUSINESS

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

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

Logistix Limited, a United Kingdom corporation (“Logistix”), is a 100% owned subsidiary of the Company which was acquired on July 31, 2001. Logistix is a marketing services agency which focuses primarily on assisting consumer packaged goods companies in their efforts to market to children between the ages of seven and fourteen by developing and executing premium-based promotions and by providing marketing consulting services. Logistix also derives a portion of its revenues from a consumer products business.

The Company’s Upshot division (“Upshot”), which was acquired on July 17, 2002, is a marketing agency, specializing in promotion, event, collaborative marketing, retail design and environmental branding.

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

Johnson Grossfield, Inc., a Delaware corporation (“JGI”), is 100% owned subsidiary of the Company, which was formed in January 2004 to acquire the promotions business of Johnson Grossfield, Inc., a Minnesota corporation. The JGI business, which was acquired on February 2, 2004 (effective January 31, 2004), is a promotional marketing services business specializing in providing custom licensed premiums for the kids marketing program of Subway Restaurants.

NOTE 2 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management and subject to year-end audit, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results for a full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Certain reclassifications have been made to the condensed consolidated balance sheet as December 31, 2003 to conform it to the 2004 presentation. Advances under an import/letter of credit facility (see Note 3) which were originally recorded as accounts payable as of December 31, 2003 have been reclassified to short-term debt.

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Net Income Per Share

Basic net income (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during each period. Net income (loss) available to common stockholders represents reported net income (loss) less preferred stock dividend requirements and less undistributed earnings allocated to participating preferred stock.

Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS includes in-the-money options using the treasury stock method. During a loss period, the assumed exercise of in-the-money stock options has an antidilutive effect. As a result, these shares are not included with the weighted average shares outstanding used in the calculation of diluted loss per share for the three and nine month periods ended September 30, 2004. Options to purchase 1,146,666 and 2,108,666 shares of common stock, $.001 par value per share (the “Common Stock”), as of September 30, 2003 and 2004, respectively, were excluded from the computation of diluted EPS as they would have been anti-dilutive. For the three and nine months ended September 30, 2003 and 2004, preferred stock convertible into 1,694,915 shares of common stock was excluded from the computation of diluted EPS as it would have been anti-dilutive.

Earnings per share for the third quarter and nine months ended September 30, 2003 reflect a restatement pursuant to Emerging Issues Task Force Issue No. 03-6, “Participating Securities and the Two-Class Method under SFAS No. 128, Earnings Per Share” (“EITF 03-6”). EITF 03-6 requires that companies with participating securities calculate earnings per share using a two-class method. The Company’s cumulative participating mandatorily redeemable preferred stock qualifies as “participating securities” since it is entitled to dividends declared on the Company’s common stock; therefore, EITF 03-6 requires the allocation of a portion of undistributed earnings to preferred stock. As a result, earnings per basic common share were reduced by $0.04 for the third quarter of 2003, to $0.13 from $0.17 as reported in the prior year. The earnings per diluted common share were reduced by $0.03 for the third quarter of 2003, to $0.12 from $0.15 as reported in the prior year. The earnings results per basic common share were reduced by $0.13 for the nine months ending September 30, 2003, to $0.45 from $0.58 as reported in the prior year. The earnings results per diluted common share were reduced by $0.13 for the nine months ending September 30, 2003, to $0.42 from $0.55 as reported in the prior year. EITF 03-6 had no impact on 2004 per share amounts because of the net loss.

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for “income available to common shareholders” and other disclosures required by Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share” and EITF 03-6:

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Inventories

Inventories consist of (a) production-in-process which primarily represents tooling costs which are deferred and amortized over the life of the products and deferred costs on service contracts and (b) purchased finished goods held for sale to customers and purchased finished goods in transit to customers’ distribution centers. Inventories are stated at the lower of average cost or market. As of December 31, 2003 and September 30, 2004, inventories consisted of the following:

Foreign Currency Translation

Net foreign exchange gains or losses resulting from the translation of foreign subsidiaries’ accounts whose functional currency is not the United States dollar are recognized as a component of accumulated other comprehensive income in stockholders’ equity. For such subsidiaries, accounts are translated into United States dollars at the following rates of exchange: assets and liabilities at period-end exchange rates, equity accounts at historical rates, and income and expense accounts at average exchange rates during the period.

For subsidiaries with transactions denominated in currencies other than their functional currency, net foreign exchange transaction gains or losses are included in determining net income (loss). Transaction gains included in net income (loss) for the quarters ended September 30, 2003 and 2004 were $179 and $186, respectively. Transaction gains or (losses) included in net income (loss) for the nine months ended September 30, 2003 and 2004 were $507 and $(136), respectively.

Derivative Instruments

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

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

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

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

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The Company’s Logistix subsidiary entered into foreign currency forward contracts aggregating GBP 7,481 to sell Euros in exchange for British pounds and United States dollars and to sell British pounds in exchange for United States dollars. The contracts will expire by August 4, 2005. At September 30, 2004, the foreign currency forward contracts had an estimated fair value of $(112). The fair value of the foreign currency forward contracts is recorded in accrued liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2004. The unrealized loss on the contracts is reflected in accumulated other comprehensive income.

The Company’s JGI subsidiary entered into foreign currency forward contracts aggregating $412 to sell Canadian dollars in exchange for United States dollars. The contracts will expire by January 31, 2005. At September 30, 2004, the foreign currency forward contracts had an estimated fair value of $(20).

Goodwill and Other Intangibles

SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” were approved by the Financial Accounting Standards Board (“FASB”) effective June 30, 2001 for business combinations consummated after June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method for business combinations and requires use of the purchase method. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization approach to a non-amortization (impairment) approach. The statement requires amortization of goodwill recorded in connection with previous business combinations to cease upon adoption of the statement by calendar year companies on January 1, 2002. Accordingly, beginning on January 1, 2002, the Company has foregone all related goodwill amortization expense.

The change in the carrying amount of goodwill from $41,893 as of December 31, 2003 to $44,325 as of September 30, 2004 reflects: a foreign currency translation adjustment of $178, an adjustment to reflect the net increase to goodwill for the SCI acquisition of $932 (see Note 6) and $1,322 for the acquisition of JGI (see Note 6). Of the goodwill balance, $0 relates to the consumer products segment and $44,325 relates to the marketing services segment.

Identifiable intangibles of $1,252 as of December 31, 2003 and, $3,250 as of September 30, 2004 a portion of which are subject to amortization, are included in other intangibles in the condensed consolidated balance sheets.

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

Royalties

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

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair-value for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

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As of September 30, 2004, the Company had three stock-based compensation plans — the 2000 Stock Option Plan, the 2004 Stock Incentive Plan and the 2004 Non-Employee Director Stock Incentive Plan. In accordance with provisions of SFAS No. 123, the Company applies Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans and, accordingly, does not recognize compensation cost for grants whose exercise price equals the market price of the stock on the date of grant. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated in the table below:

(a)

Determined under fair value based method for all awards, net of tax.

Recent Accounting Pronouncements

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

In March 2004, the FASB published an Exposure Draft, “Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.” The proposed change in accounting would replace existing requirements under SFAS No. 123 and APB Opinion No. 25. The proposed statement would require public companies to recognize the cost of employee services received in exchange for equity instruments, based on the grant-date fair value of those instruments, with limited exceptions. The proposed statement would also affect the pattern in which compensation cost would be recognized, the accounting for employee share purchase plans, and the accounting for income tax effects of share-based payment transactions. The Exposure Draft also notes that the use of a lattice model, such as the binomial model, to determine the fair value of employee stock options, is preferable. The Company currently uses the Black-Scholes pricing model to determine the fair value of its employee stock options. Use of a lattice model to determine the fair value of employee stock options may result in compensation cost materially different from those pro forma costs disclosed above under “Stock-Based Compensation” in this Note 2 to the condensed consolidated financial statements. The effective date of the proposed standard is for periods beginning after June 15, 2005. The Company is currently determining what impact the proposed statement would have on its results of operations or financial position.

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In November 2003 and March 2004, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The EITF requires a company to apply a three-step model to determine whether an impairment of an investment, within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” is other-than-temporary. EITF Issue No. 03-1 shall be applied prospectively to all current and future investments, in interim or annual reporting periods beginning after June 15, 2004. The adoption of EITF Issue No. 03-1 did not have a material impact on the Company’s results of operations or financial position because the Company does not have any investments in marketable securities as September 30, 2004.

In April 2004, the EITF reached final consensus on EITF 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” which requires companies that have participating securities to calculate earnings per share using the two-class method. This method requires the allocation of undistributed earnings to the common shares and participating securities based on the proportion of undistributed earnings that each would have been entitled to had all the period’s earnings been distributed. EITF 03-6 is effective for fiscal periods beginning after March 31, 2004 and earnings per share reported in prior periods presented must be retroactively adjusted in order to comply with EITF 03-6. The Company has adopted EITF 03-6 for the quarter ended June 30, 2004. As a result, earnings per basic common share were reduced by $0.04 for the third quarter of 2003, to $0.13 from $0.17 as reported in the prior year. The earnings per diluted common share were reduced by $0.03 for the third quarter of 2003, to $0.12 from $0.15 as reported in the prior year. The earnings results per basic common share were reduced by $0.13 for the nine months ending September 30, 2003, to $0.45 from $0.58 as reported in the prior year. The earnings results per diluted common share were reduced by $0.13 for the nine months ending September 30, 2003, to $0.42 from $0.55 as reported in the prior year. EITF 03-6 had no impact on 2004 per share amounts because of the net loss.

In September 2004, the consensus of EITF Issue No. 04-10, "Applying Paragraph 19 of FASB Statement No. 131, 'Disclosures about Segments of an Enterprise and Related Information,' in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds," was published. EITF Issue No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. The provisions of EITF Issue No. 04-10 are effective for fiscal years ending after October 13, 2004. The Company is currently in the process of determining the impact of this consensus on its financial results.

NOTE 3 — LINE OF CREDIT

On April 24, 2001, the Company signed a credit facility (the “Facility”) with Bank of America. On April 26, 2004, the maturity date of the Facility was extended through June 30, 2005. The credit facility is secured by substantially all of the Company’s assets and provides for a line of credit of up to $35,000 with borrowing availability determined by a formula based on qualified assets. Interest on outstanding borrowings will be based on either a fixed rate equivalent to LIBOR plus an applicable spread of between 1.50 and 2.25 percent or a variable rate equivalent to the bank’s reference rate plus an applicable spread of between zero and 0.50 percent. The Company is also required to pay an unused line fee of between zero and 0.60 percent per annum and certain letter of credit fees. The applicable spread is based on the achievement of certain financial ratios. The Facility also requires the Company to comply with certain restrictions and covenants as amended from time to time. On November 14, 2001, February 8, 2002, September 30, 2002, November 14, 2003, April 26, 2004, August 12, 2004 and November 15, 2004, certain covenants under the facility were amended. As of September 30, 2004, the Company was in compliance with the amended restrictions and covenants. In addition to amending certain covenants, the November 15, 2004 amendment imposed a temporary $12,000 cap on total outstanding borrowings and letters of credit. Bank of America will reassess the cap in December 2004. This amendment also increases the maximum interest rate on outstanding borrowings by 0.25 percent. The Facility may be used for working capital and acquisition financing purposes. As of September 30, 2004, there were no borrowings outstanding under the Facility. Letters of credit outstanding under the Facility as of December 31, 2003 and September 30, 2004 totaled $823 and $3,358, respectively.

In addition to the Facility, in October, 2003 the Company’s Logistix subsidiary established an import/letter of credit facility with Hong Kong Shanghai Bank Corp. (“HSBC”) to provide short-term financing of product purchases from Asia. The total availability under this facility is 1,000 GBP. Under this facility HSBC may pay Logistix’s vendors directly upon receipt of invoices and shipping documentation. Logistix in turn is obligated to repay HSBC within 120 days. As of December 31, 2003 and September 30, 2004, advances outstanding under this facility totaled approximately $626 and $1,489, respectively, and were recorded in short-term debt in the accompanying condensed consolidated balance sheet.

NOTE 4 — STOCK REPURCHASE

On July 21, 2000, the Company’s Board of Directors authorized up to $10,000 for the repurchase of the Company’s common stock over a twelve month period. In the period from July 21, 2000 to July 21, 2001, the Company spent $6,430 to purchase an aggregate of 523,594 shares at an average price of $12.28 per share including commissions. On July 24, 2001, the Company’s Board of Directors authorized up to an additional $10,000 for the repurchase of the Company’s common stock over a twelve month period. In the period from August 2, 2001 through July 11, 2002, the Company spent $5,605 to purchase 454,715 shares at an average price of $12.33 per share including commissions. On July 12, 2002, the Company’s Board of Directors authorized up to an additional $10,000 for the repurchase of the Company’s common stock. The Company spent $3,505 to repurchase 267,650 shares at an average price of $13.10 per share including commissions under this authorization through September 30, 2004. The duration of the current buyback program is indefinite; provided, however, that the Company’s Board of Directors

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intends to review the program periodically. Purchases are conducted in the open market at prevailing prices, based on market conditions when the Company is not in a quiet period. The Company may also transact purchases effected as block trades, as well as certain negotiated, off-exchange purchases not in the open market. Since initiating the overall buyback program on July 20, 2000, the Company has spent $15,540 to purchase a total of 1,245,959 shares at an average price of $12.47 per share including commissions through September 30, 2004. There were no purchases for the quarter ended September 30, 2004. This repurchase program is being funded through working capital.

NOTE 5 — SEGMENTS

The Company has identified two reportable segments through which it conducts its continuing operations: marketing services and consumer products. The factors for determining the reportable segments were based on the distinct nature of their operations. They are managed as separate business units because each requires and is responsible for executing a unique business strategy. The marketing services segment designs and produces promotional products used as free premiums or sold in conjunction with the purchase of other items at a retailer or quick service restaurant and provides various services such as strategic planning and research, entertainment marketing, promotion, event marketing, collaborative marketing, retail design, and environmental branding. Marketing services programs are used for marketing purposes by both the companies sponsoring the promotions and the licensors of the entertainment properties on which the promotional programs are often based. The consumer products segment designs and contracts for the manufacture of toys and other consumer products for sale to major mass market and specialty retailers, who in turn sell the products to consumers.

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

Certain information presented in the tables below has been restated to conform to the current management structure as of January 1, 2004. Specifically, the results and assets of the USI division, which had previously been reported as part of Consumer Products, are now being reported as part of Marketing Services, which is consistent with management responsibility for this business. Effective January 1, 2004, the USI division was carved out of the Company’s Consumer Products division and consolidated with the Company’s SCI division (acquired September 3, 2003) which is part of the Marketing Services segment. The vast majority of the revenues for the USI division represent sales of made-to-order custom product to oil & gas and other retailers who in turn sell the products to consumers.

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Industry Segments

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NOTE 6 — ACQUISITIONS

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

The SCI Acquisition has been accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price to the acquired net assets based on their estimated fair values as of the acquisition date. During the nine months ended September 30, 2004, the preliminary allocation of the purchase price was adjusted to revise the estimated value of prepaid expenses ($64 decrease), receivable from SCI ($55 decrease) and accrued liabilities ($13 increase). The allocation reflects a receivable from SCI-LLC resulting from a closing balance sheet working capital adjustment of $800, accruing interest at the rate of 5% per annum, that will offset additional earnout consideration. Based on the results for 2003, additional consideration of $800 was earned and offset the receivable from SCI-LLC. The additional earnout consideration was recorded as additional goodwill as of September 30, 2004. The Company’s allocation of purchase price for the acquisition, based upon estimated fair values is as follows:

The intangible assets of $728 are comprised of customer contracts and related customer relationships and sales order backlog, and are being amortized over estimated useful lives ranging from 4 months to 5 years.

On February 2, 2004 (effective January 31, 2004), the Company acquired certain assets of Johnson Grossfield, Inc. (“JGI-MN”), a privately held promotional marketing services company based in Minneapolis, Minnesota (the “JGI Acquisition”). The Company financed the JGI Acquisition through its existing cash reserves. The acquisition was consummated pursuant to an Asset Purchase Agreement dated January 16, 2004, by and among the Company, JGI, JGI-MN, Marc Grossfield and Thom Johnson (the “Purchase Agreement”). Under the terms of the Purchase Agreement, the Company purchased the assets of JGI-MN’s promotional agency business for approximately $4,325 in cash (net of a holdback of $250) and 35,785 shares of the Company’s common stock (which, based upon the January 30, 2004 closing market price of $14.80, had a value of $530), plus related transaction costs of $184 and a commitment to pay additional earnout consideration of up to $4,500 based upon future performance of the acquired business. The Company also assumed the operating liabilities of the promotional agency business in connection with the acquisition. The earnout consideration is based upon the acquired business achieving targeted levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”) over the period from 2004 through 2008. The earnout payments, if required, are payable 50% in cash and 50% in shares of the Company’s common stock. The additional consideration, if any, will be recorded as goodwill.

The JGI Acquisition has been accounted for under the purchase method of accounting. The financial statements reflect the preliminary allocation of the purchase price to the acquired net assets based on their estimated fair values as of the acquisition date. The Company is in the process of finalizing valuations of the individual assets and liabilities which may result in an adjustment to goodwill and other intangibles. The allocation of the purchase price may change based upon these valuations. However, the Company does not expect significant changes to the preliminary allocation of the purchase price. As of September 30, 2004, the preliminary allocation of the purchase price was adjusted to revise the estimated value of accounts receivable ($31 decrease), inventory ($68 decrease) and accrued liabilities ($19 decrease). During the second quarter of 2004, additional consideration was paid in the amount of $105 as a working

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capital adjustment. The Company’s preliminary allocation of purchase price for the JGI Acquisition, based upon estimated fair values is as follows:

The intangible assets of $2,243 are comprised of customer relationships and a non-competition agreement, and are being amortized over estimated useful lives ranging from 2 years to 12 years.

In connection with the SCI and JGI Acquisitions, the Company formulated and implemented an integration plan and incurred integration costs, including travel, training and consulting costs. Such costs totaled $0 and $136 for the three month and nine month periods ended September 30, 2004, respectively, and were recorded as integration costs in the condensed consolidated statements of operations.

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

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

NOTE 7 — RELATED PARTIES

On July 15, 2003, the Company entered into an agreement with U.S. Capital Investors, Inc. (“USCI”), an entity controlled by Jeffrey S. Deutschman, pursuant to which USCI served as an advisor to the Company with respect to potential mergers and acquisitions through December 31, 2003 (the “2003 Agreement”). On August 23, 2004, the Company entered into another advisory agreement with USCI for services during 2004 (the “2004 Agreement”). Mr. Deutschman currently serves on the Board of Directors of the Company as the representative of the holder of the Company's Series A Preferred Stock. The Company's agreements with USCI provide for the payment of a discretionary success fee for completed acquisition transactions in an amount determined by an independent committee of the Board. The 2003 Agreement sets forth guidelines for fees payable upon successful completion of an acquisition transaction of $200 for up to $10,000 of consideration, 1.5% of consideration from $10,000 to $25,000 and 1% of consideration over $25,000; provided, however, that the success fee for the first transaction under the agreement has an initial fee guideline of $275 for up to $10,000 of consideration. Notwithstanding the guidelines, the independent committee has absolute discretion in determining the amount, if any, of the success fee for any transaction. The 2004 Agreement does not include success fee guidelines. The USCI agreements provide for the payment of a refundable advance against success fees in the aggregate amount of $275 under the 2003 Agreement and $322 under the 2004 Agreement. The Company believes that these agreements are enhancing its ability to analyze and close merger and acquisition transactions in a manner that is more cost effective than traditional outside advisory firms. In connection with the acquisition of SCI (see Note 6), USCI earned a success fee of $275. This success fee is recorded as a transaction cost of the SCI acquisition. In connection with the February 2004 acquisition of JGI, USCI earned a success fee of $125. This success fee is recorded as a transaction cost of the JGI acquisition.

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NOTE 8 — MANDATORILY REDEEMABLE PREFERRED STOCK

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability company (“Crown”), invested $11,900 in EMAK in exchange for preferred stock and warrants to purchase additional preferred stock. Under the terms of the investment, Crown acquired 11,900 shares of Series A mandatory redeemable senior cumulative participating convertible preferred stock, par value $.001 per share, (the “Series A Stock”) with a conversion price of $14.75 per share. In connection with such purchase, the Company granted to Crown five year warrants (collectively, the “Warrants”) to purchase 5,712 shares of Series B senior cumulative participating convertible preferred stock, par value $.001 per share, (the “Series B Stock”) at an exercise price of $1,000 per share, and 1,428 shares of Series C senior cumulative participating convertible preferred stock, par value $.001 per share, (the “Series C Stock”) at an exercise price of $1,000 per share. The Warrants were immediately exercisable. The conversion prices of the Series B Stock and the Series C Stock were $16.00 and $18.00 per share, respectively. On June 20, 2000, Crown paid EMAK an additional $13,100 in exchange for an additional 13,100 shares of Series A Stock with a conversion price of $14.75 per share. In connection with such purchase, EMAK granted to Crown additional Warrants to purchase another 6,288 shares of Series B Stock and another 1,572 shares of Series C Stock. Each share of Series A Stock is convertible into 67.7966 shares of Common Stock, representing 1,694,915 shares of Common Stock in aggregate. Each share of Series B Stock and Series C Stock was convertible into 62.5 and 55.5556 shares of Common Stock, respectively, representing 916,666 shares of Common Stock in aggregate. Also in connection with such purchase, the Company agreed to pay Crown a commitment fee in the aggregate amount of $1,250, paid in equal quarterly installments of $62.5 commencing on June 30, 2000 and ending on June 30, 2005. No payment was made during the quarter ended September 30, 2004.

On March 19, 2004, the Company entered into a Warrant Exchange Agreement with Crown whereby Crown received new warrants to purchase an aggregate of 916,666 shares of Common Stock (“New Warrants”) in exchange for cancellation of the existing Warrants to purchase shares of Series B Stock and Series C Stock (which, upon issuance, would have been convertible into 916,666 shares of Common Stock). The New Warrants consist of warrants to purchase 750,000 shares and 166,666 shares of Common Stock at exercise prices of $16.00 and $18.00 per share, respectively. Of each tranche, 47.6% expire on March 29, 2010 and 52.4% expire on June 20, 2010. As a result of the exchange transaction, Crown received an extension of time in which to exercise its right to purchase additional equity in EMAK, and EMAK obtained an elimination of the preferred rights and preferences as well as the preferred dividend associated with the now eliminated Series B Stock and Series C Stock. The exchange was recorded as a reduction to preferred stock of $531 and an increase to additional paid-in-capital of $487, net of transaction costs of $44.

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

The Series A Stock is subject to mandatory redemption at the option of the holder at 101% of the aggregate Liquidation Preference plus accrued and unpaid dividends if a change in control occurs.

Crown has voting rights equivalent to the number of shares of Common Stock into which their Series A Stock is convertible on the relevant record date. Crown is also entitled to receive a quarterly dividend equal to 6% of the Liquidation Preference per share outstanding, payable in cash. The dividends for the quarter ended September 30, 2004 totaled $375 and were paid in October 2004 and recorded in accounts payable in the accompanying condensed consolidated balance sheet as of September 30, 2004.

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

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

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NOTE 9-COMMITMENTS AND CONTINGENCIES

Operating Leases

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

Future minimum lease payments under non-cancelable operating leases as of September 30, 2004 are as follows:

Aggregate rental expenses for operating leases were $787 and $883 for the three months ended September 30, 2003 and 2004, respectively.

Guaranteed Royalties

For the three months ended September 30, 2003 and 2004, the Company incurred $1,112 and $1,067, 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 September 30, 2004, the Company has committed to pay total minimum guaranteed royalties as follows:

License agreements for certain copyrights and trademarks in the Consumer Products segment require minimum commitments for advertising over the respective terms of the licenses. The commitment for advertising expenditures is determined as a percentage of the sales (typically up to 10 percent) of certain licensed properties over the terms of their respective agreements.

Employment Agreements

The Company has employment agreements with key executives. Guaranteed compensation under these agreements as of September 30, 2004 are as follows:

NOTE 10 — RESTRUCTURING

During the second quarter of 2004, the Company formulated and implemented a restructuring plan in connection with the realignment of centralized resources in its Marketing Services business in order to combine and streamline the operations. In connection with this plan the Company recorded a restructuring charge of $105. This charge represents severance for one employee in the Company’s Los Angeles office, who was terminated, and is reflected as a restructuring charge in the accompanying condensed consolidated statement of operations. During the third quarter of 2004 there was a restructuring gain of $25 that represents a reversal of a portion of the 2003 restructuring charge related to the severance for workforce reductions at Upshot.

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NOTE 11 — LOSS ON CHICAGO LEASE

In 2003, the Company finalized its exit plan with respect to vacating half of its leased space (approximately thirty thousand square feet) at Upshot’s Chicago, Illinois office. In June 2003, this resulted in an adjustment to the liabilities recorded and an increase to goodwill of $1,900 for the present value of the remaining lease payments for the vacated office space in excess of the estimated sub-lease income. The liabilities assumed in connection with this restructuring plan totaled $3,535 and are included as part of goodwill in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” In June 2004, the Company recorded expense of $311 due to lower than estimated sublease income for the vacated office space. The office space has been subleased at rates modestly below the Company’s initial estimates, due to softness in the current Chicago real estate market.

NOTE 12 — SUBSEQUENT EVENT

On November 10, 2004, the Company completed the acquisition of all of the outstanding capital stock of Megaprint Group Limited (“Mega”), a privately held creative promotions agency headquartered in the United Kingdom, for approximately 2.25 million British pounds (approximately US$4.16 million) in cash, plus additional consideration up to a maximum of 2.45 million British pounds based on future performance through 2009. The Company financed the transaction through its existing credit facility with Bank of America. Mega is currently generating approximately $16.0 million in annualized revenue. Founded in 1969 in the Netherlands, Mega provides a wide range of promotional tools and specializes in the creation and production of programs utilizing two-dimensional (“2-D”) premiums for blue-chip corporate clients primarily in Western European markets. Its two largest clients, Kellogg’s and PepsiCo, together generate more than 50% of Mega’s total sales. Other clients included Masterfoods/Mars, Nestlé, Reader’s Digest, Unilever, Gillette and Danone. Mega has operations in the U.K. and Ireland, the Netherlands, Germany and France, and operates through sales agents in Scandinavia, the Czech Republic and the Middle East.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Organization and Business

EMAK Worldwide, Inc., a Delaware corporation and subsidiaries, is a leading marketing services company based in Los Angeles, with offices in Chicago, Minneapolis, New York, Ontario (CA), London, Paris, Hong Kong and Shanghai. We focus on the design and execution of strategy-based marketing programs, with particular expertise in the areas of: strategic planning and research, entertainment marketing, design and manufacturing of custom promotional products, promotion, event marketing, collaborative marketing, and environmental branding. Our clients include Burger King Corporation, Kellogg’s, Kohl’s, Macy’s, Nordstrom, Procter & Gamble, and Subway Restaurants, among others. We complement our core marketing services business by developing and marketing distinctive consumer products, based on emerging and evergreen licensed properties, which are sold through specialty and mass-market retailers.

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

Logistix Limited, a United Kingdom corporation (“Logistix”), is a 100% owned subsidiary which was acquired on July 31, 2001. Logistix is a marketing services agency which focuses primarily on assisting consumer packaged goods companies in their efforts to market to children between the ages of seven and fourteen by developing and executing premium-based promotions and by providing marketing consulting services. Logistix also derives a small portion of its revenues from a consumer products business.

Our Upshot division (“Upshot”), which was acquired on July 17, 2002, is a marketing agency, specializing in promotion, event, collaborative marketing, retail design and environmental branding.

Our SCI Promotion division (“SCI”), which was acquired on September 3, 2003, is a promotional marketing services business specializing in the development and execution of promotional campaigns that utilize purchase-with-purchase, gift-with-purchase, promotional licenses and promotional retail programs, principally for the retail department store industry.

Johnson Grossfield, Inc. (“JGI”), is a 100% owned subsidiary, the operations of which were acquired on February 2, 2004 (effective January 31, 2004). JGI is a promotional marketing services business specializing in providing custom licensed premiums for the kids marketing program of Subway Restaurants.

Overview

Revenues for the third quarter of 2004 increased $9,107 to $58,055 as compared to $48,948 recorded in the prior year as a result of revenue contributions from our recent acquisitions as well as revenue growth in our existing marketing services business. SCI and JGI combined generated approximately $6,935 of revenue during the quarter. Despite the revenue growth, our third quarter 2004 performance was negatively impacted by shortfalls in our Consumer Products segment and SCI Promotion business, two areas that typically generate higher margins.

We recorded a net loss of $0.22 per diluted share for the third quarter of 2004 compared to net income of $0.12 per diluted share in the prior year quarter. The net loss per share was primarily attributable to the following factors:

•

While sales in the Consumer Product segment (which includes both Pop Rocket and the consumer products business of Logistix) increased $547 from the prior year quarter, gross profit margins decreased to 18.5% of sales from 36.8% in the prior year quarter. The moderate sales growth in this segment is due to the contribution of some of our newer products such as Crayola® branded bath toys and our Baby Einstein™ line of products. However, the overall revenues in this segment fell well short of our expectations, as retailers are being more conservative than we anticipated with their inventory positions ahead of the holiday season, and some of our product lines, particularly Scooby-Doo™, have not performed as well as expected. The gross profit margin deterioration for Consumer Products is attributable to a highly competitive retail pricing environment, resulting in pricing and markdown concessions to retailers. Secondly, our raw materials costs have risen significantly due to higher plastic resin costs resulting from record-high oil prices. As a result, Consumer Product margins are being pressured

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		from both revenues and cost of sales.
•		Gross profit margins in the Marketing Services segment decreased to 21.8% in the third quarter of 2004, as compared to 25.9 percent in the prior year. This reduction was due to the deferral of fee-based services to the fourth quarter, as well as a rapid rise in raw materials costs which could not be recaptured from clients due to long lead times on programs.
•		Collectively, SCI and JGI were $0.03 dilutive per share as a result of net losses at SCI. The results for SCI for the quarter fell well short of expectations. The weakness at SCI is attributable to deferrals of scheduled promotional programs into 2005, as well as cancellations of promotional programs due to specific business issues at client companies. As a result, we did not achieve the sales volume necessary to absorb the largely fixed cost structure of this business. This resulted in increased operating expenses as a percentage of revenues.
•		Operating expenses in the third quarter of 2004 include approximately $190, or $0.02 per diluted share, in non-cash expense related to grants of restricted stock units, compared with $62, or $0.01 per diluted share recognized in the same period of 2003. We began using restricted stock units as our primary means of stock based compensation in the second quarter of 2003 and made additional grants at the beginning of the second quarter of 2004.

Our Burger King business performed in line with our expectations. During the quarter we implemented two domestic premium programs and three international ones. This is essentially the same number of promotional programs that we have typically produced for Burger King in the third quarter. For the third quarter, unit volumes for the domestic programs have increased relative to the prior year. As we expected, we are seeing the trend of lower domestic unit volumes which we experienced in the first half of 2003 begin to turn around as a result of the recent improvements in Burger King system sales of Kids Meals.

Despite the year to date losses, we expect to generate positive net income for the fourth quarter of 2004 as a result of the holiday promotions of several of our largest clients. However, due to the weakness in the Consumer Products and SCI businesses, the Company will likely not be profitable on a full year basis for 2004.

Results of Operations

The following table sets forth, for the periods indicated, the Company’s operating results as a percentage of total revenues:

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Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003:

Revenues

Revenues for the three months ended September 30, 2004 increased $9,107, or 18.6%, to $58,055 from $48,948 in the comparable period in 2003. Marketing Services revenues increased $8,560, or 20.3%, to $50,717 as a result of increased revenues resulting from the JGI Acquisition, additional revenues generated by our Logistix subsidiary and our Burger King business, partially offset by decreased revenues in our SCI business. Our Logistix business had increased revenues from Kellogg’s promotional programs compared to the same period in 2003. Revenues for the Burger King business increased as the volume of units for domestic promotional programs were higher in the third quarter of 2004 compared to the same period in 2003. In addition, net foreign currency translation impact contributed approximately $1,299 to revenues for Logistix versus the prior year period average exchange rates.

Results for the third quarter of 2003 include one month of revenues for SCI Promotion (acquired September 3, 2003) and excludes JGI (acquired February 2, 2004). Excluding the impact of the SCI and JGI Acquisitions, Marketing Services revenues increased 7.1% for the three months ended September 30, 2004 compared to the same period in 2003.

Consumer Product revenues increased $547, or 8.1%, to $7,338. The increase is primarily attributable to the continued growth of Crayola^® branded bath toys, increased international sales of Scooby-Doo™ product, and the addition of the Baby Einstein™ products. Our third quarter 2004 Consumer Product revenues were primarily comprised of Scooby-Doo™, Crayola^®, Baby Einstein™, and Kim Possible™ product. In January 2004, we began distributing the first toy products based on Baby Einstein™, the best selling brand of videos specifically designed for infants and toddlers. We have granted exclusive distribution to Target and Babies ’R’ Us for 2004. The growth in our Crayola^® line of bath toys, which was launched in the second half of 2003, was attributable to an expanded product line and expanded distribution channels. The growth in Scooby-Doo™ international revenues for the quarter was attributable to the brand receiving more exposure on television in Europe and Latin America. The growth in international sales of Scooby-Doo™ was partially offset by a decline in domestic Scooby-Doo™ sales.

Cost of sales and gross profit

Cost of sales increased $10,132 to $45,645 (78.6% of revenues) for the three months ended September 30, 2004 from $35,513 (72.6% of revenues) in the comparable period in 2003.

The gross margin percentage decreased to 21.4% for the three months ended September 30, 2004 from 27.4% in the comparable period for 2003. The gross profit percentage for Marketing Services for the three months ended September 30, 2004 decreased to 21.8% compared to 25.9% for the comparable period in 2003. This decrease is attributable to the deferral of higher margin fee-based services to the fourth quarter as well as a rapid rise in raw materials costs which could not be recaptured from clients due to long order lead times. The gross profit percentage for Consumer Products decreased to 18.5% for the three months ended September 30, 2004 from 36.8% in the comparable period in 2003. This decrease is primarily the result of a highly competitive retail pricing environment resulting in pricing and markdown concessions to retailers, increased costs for plastic resin resulting from higher oil prices and a higher mix of international sales which carry lower margins. International sales, which are sold through distributors who bear more of the risk and incur the bulk of the selling expenses, tend to carry lower gross margins than domestic sales.

Salaries, wages and benefits

Salaries, wages and benefits increased $1,845, or 30.0%, to $7,986 (13.8% of revenues) for the three months ended September 30, 2004 from $6,141 (12.6% of revenues) in the comparable period for 2003. This increase was primarily attributable to the addition of approximately 55 employees from the SCI and JGI Acquisitions as well as annual employee merit pay increases and additional compensation expense resulting from grants of restricted stock units.

Salaries, wages and benefits increased as a percentage of revenues from 12.6% to 13.8% as a result of revenues increasing at a lesser rate. Due to the weakness at SCI, which was attributable to deferrals and cancellations of scheduled promotional programs, we did not achieve the sales volume necessary to absorb the largely fixed cost structure of this business.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $541, or 9.8%, to $6,087 (10.4% of revenues) for the three months ended September 30, 2004 from $5,546 (11.3% of revenues) in the comparable period for 2003. The increase is attributable to additional operating expenses resulting from the SCI and JGI Acquisitions.

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Selling, general and administrative expenses decreased as a percentage of revenues from 11.3% to 10.4% as a result of a reduction in selling expenses as a percentage of revenues due primarily to reduced freight out costs. The reduction in freight out is attributable to a shift in the delivery location for product sales to a large customer.

Restructuring gain

We recorded a restructuring gain of $25 for the three months ended September 30, 2004. This represents a reversal of a portion of the 2003 restructuring charge related to the severance for workforce reductions at Upshot.

Other income

Other income, net decreased $9 to $179 for the three months ended September 30, 2004 from $188 in the comparable period for 2003.

Provision (benefit) for taxes

The effective tax rate for the three months ended September 30, 2004 was 38.8% compared to 31.5% for the same period in 2003. The increase in the effective tax rate is the result of a net loss being generated domestically in 2004 relative to net income in 2003 which was primarily generated internationally in territories which have more favorable tax rates.

Net income (loss)

Net income decreased $2,220 to a net loss of $893 ((1.5)% of revenues) in 2004 from net income of $1,327 (2.7% of revenues) in 2003 primarily due to lower gross profit margins and increased salaries, wages and benefits attributable to the SCI and JGI Acquisitions.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003:

Revenues

Revenues for the nine months ended September 30, 2004 increased $8,177, or 5.3%, to $161,645 from $153,468 in the comparable period in 2003. Marketing Services revenues increased $12,245, or 9.3%, to $144,400 primarily as a result of increased revenues resulting from the SCI and JGI Acquisitions. The increase in Marketing Services revenues was also attributable to additional revenues generated by our Logistix subsidiary. Our Logistix business had increased revenues from Kellogg’s promotional programs compared to the same period in 2003. In addition, net foreign currency translation impact contributed approximately $3,463 to revenues for Logistix versus the prior year period average exchange rates. Revenues for the Burger King business decreased as the volume of units for domestic promotional programs were lower in the first half of 2004 compared to the same period in 2003.

Results for the nine months ended September 30, 2003 include one month of revenues for SCI Promotion (acquired September 3, 2003) and excludes JGI (acquired February 2, 2004). Excluding the impact of the SCI and JGI Acquisitions, Marketing Services revenues decreased 3.0% for the nine months ended September 30, 2004 compared to the same period in 2003. SCI and JGI combined generated approximately $17,635 of revenues in the current year period.

Consumer Product revenues decreased $4,068, or 19.1%, to $17,245. The decrease is primarily attributable to a significant one-time stocking of Kim Possible™ merchandise in the nine months ended September 30, 2003. Our Kim Possible™ line was launched in the nine months ended September 30, 2003 as a Wal-Mart exclusive; distribution expanded to other major retailers beginning in January 2004. The decrease was partially offset by increased international sales of Scooby-Doo™ product, the continued growth of Crayola^® branded bath toys, and the addition of the Baby Einstein™ products. Revenues for the nine months ended September 30, 2003 were primarily comprised of Scooby-Doo™, Crayola^®, Baby Einstein™ and Kim Possible™ product. In January 2004, we began distributing the first toy products based upon Baby Einstein™, the best selling brand of videos specifically designed for infants and toddlers. We have granted exclusive distribution to Target and Babies ’R’ Us for 2004. The growth in our Crayola^® line of bath toys, which was launched in the nine months ended September 30, 2003, was attributable to an expanded product line and expanded distribution channels. The growth in Scooby-Doo™ international revenues for the nine months ended September 30, 2004 was attributable to the brand receiving more exposure on television in Europe and Latin America. The growth in international sales of Scooby-Doo™ was partially offset by a decline in domestic Scooby-Doo™ sales.

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Cost of sales and gross profit

Cost of sales increased $9,666 to $122,232 (75.6% of revenues) for the nine months ended September 30, 2004 from $112,566 (73.3% of revenues) in the comparable period in 2003 due to higher sales volume in 2004.

The gross margin percentage decreased to 24.4% for the nine months ended September 30, 2004 from 26.7% in the comparable period for 2003. The gross profit percentage for Marketing Services for the nine months ended September 30, 2004 decreased to 24.5% compared to 25.0% for the comparable period in 2003. This decrease is attributable to the deferral of higher margin fee-based services to the fourth quarter as well as a rapid rise in raw materials costs which could not be recaptured from clients due to long order lead times. The gross profit percentage for Consumer Products decreased to 23.0% for the nine months ended September 30, 2004 from 36.6% in the comparable period in 2003. This decrease is primarily the result of a highly competitive retail pricing environment resulting in pricing and markdown concessions to retailers, increased costs for plastic resin resulting from higher oil prices and a higher mix of international sales which carry lower margins. International sales, which are sold through distributors who bear more of the risk and incur the bulk of the selling expenses, tend to carry lower gross margins than domestic sales. The decrease in Consumer Products margins is also partially attributable to a significant one-time stocking of high margin Kim Possible merchandise in the second quarter of 2003.

Salaries, wages and benefits

Salaries, wages and benefits increased $5,624, or 32.1%, to $23,163 (14.3% of revenues) for the nine months ended September 30, 2004 from $17,539 (11.4% of revenues) in the comparable period for 2003. This increase was primarily attributable to the addition of approximately 55 employees from the SCI and JGI Acquisitions as well as annual employee merit pay increases and additional compensation expense resulting from grants of restricted stock units.

Salaries, wages and benefits increased as a percentage of revenues from 11.4% to 14.3% as a result of revenues increasing at a lesser rate. Due to the weakness at SCI, which was attributable to deferrals and cancellations of scheduled promotional programs, we did not achieve the sales volume necessary to absorb the largely fixed cost structure of this business. In addition, the reduction in Burger King unit volume in the first half of 2003 had a significant impact on this metric, as our staffing levels required to service this account are largely fixed.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $1,087, or 6.4%, to $18,143 (11.2% of revenues) for the nine months ended September 30, 2004 from $17,056 (11.1% of revenues) in the comparable period for 2003. The increase is primarily the result of additional operating expenses resulting from the SCI and JGI Acquisitions.

Integration costs

We recorded integration costs of $136 (0.1% of revenues) for the nine months ended September 30, 2004. These are primarily travel, training and consulting costs directly related to the integration of SCI and JGI.

Loss on Chicago lease

We recorded a charge for the loss on the Chicago office lease of $311 (0.2% of revenues) for the nine months ended September 30, 2004. This is due to lower than estimated sublease income for vacated office space in the Upshot business. The office space has been subleased at rates modestly below our initial estimates, due to softness in the current Chicago real estate market.

Restructuring charge

We recorded a net restructuring charge of $80 (0.1% of revenues) for the nine months ended September 30, 2004. This is associated with the realignment of centralized resources in our Marketing Services business, partially offset by a reversal of a portion of the 2003 restructuring charge related to the severance for workforce at Upshot.

Other income (expense)

Other income (expense), net, decreased $676 to $(181) for the nine months ended September 30, 2004 from $495 in the comparable period for 2003. This decrease was due to foreign currency transaction losses in the first quarter of 2004 as a result of the strengthening Euro relative to the British Pound. The growth in the pan-European business at Logistix during the first quarter of 2004 surpassed the currency hedges in place covering the British pound against the Euro.

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Provision (benefit) for taxes

The effective tax rate for the nine months ended September 30, 2004 was 38.9% compared to 34.7% for the same period in 2003. The increase in the effective tax rate is the result of a net loss being generated domestically in 2004 relative to net income in 2003 which was primarily generated internationally in territories which have more favorable tax rates.

Net income (loss)

Net income (loss) decreased $6,034 to a net loss of $1,589 ((1.0)% of revenues) in 2004 from net income of $4,445 (2.9% of revenues) in 2003 primarily due to lower gross profit margins, increased salaries, wages and benefits and selling, general and administrative expenses attributable to the acquisitions of SCI and JGI. The decrease is also the result of foreign currency transaction losses as a result of the strengthening Euro relative to the British pound and the loss on the Chicago lease.

Financial Condition and Liquidity

At September 30, 2004, cash and cash equivalents were $8,057, compared to $19,291 as of December 31, 2003. The decrease in cash and cash equivalents was attributable to the JGI Acquisition, the net loss for the nine months ended September 30, 2004, an investment in inventories ahead of an anticipated seasonally strong fourth quarter, and purchases of fixed assets.

As of September 30, 2004, our net accounts receivable decreased $74 to $36,691 from $36,765 at December 31, 2003.

As of September 30, 2004, inventories increased $4,167 to $19,266 from $15,099 at December 31, 2003. This increase in inventories is primarily the result of purchases of inventory ahead of an anticipated seasonally strong fourth quarter. In addition, the increase was due to additional inventories acquired as a result of the JGI Acquisition. Marketing Services inventories represent 72% and 71% of total inventories as of September 30, 2004 and December 31, 2003, respectively. Promotional product inventory used in Marketing Services generally has lower risk than Consumer Product inventory, as it usually represents product made to order.

As of September 30, 2004, short-term debt increased $863 to $1,489 from $626 at December 31, 2003. This increase is associated with the bank advances to our Logistix subsidiary to finance inventory purchases. Advances under this facility as of December 31, 2003 were originally recorded in accounts payable and have been reclassified to conform to the current period presentation.

As of September 30, 2004, accounts payable increased $1,093 to $29,332 from $28,239 at December 31, 2003. This increase was attributable to the increased inventory purchases as well as additional payables as a result of the JGI Acquisition.

As of September 30, 2004, accrued liabilities decreased $2,139 to $15,056 from $17,195 at December 31, 2003. This decrease is primarily attributable to the payment of administrative fees collected from distribution companies during the fourth quarter of 2003 on behalf of promotional customers, as well as, the payment of royalties and income taxes. This decrease was partially offset by additional accrued liabilities as a result of the JGI Acquisition.

As of September 30, 2004, working capital was $22,836 compared to $29,447 at December 31, 2003. Cash used by operations for the nine months ended September 30, 2004 were $5,638 compared to $2,834 in the prior year. Cash flows used in operations in the nine months ended September 30, 2004 were primarily the result of the net loss for the nine months ended September 30, 2004 as well as purchases of inventories ahead of an anticipated seasonally strong fourth quarter. Cash flows used in investing activities for the nine months ended September 30, 2004 were $5,674 compared to $8,028 in the prior year. This decrease is the result of the SCI Acquisition in September 2003 and reduced purchases of marketable securities partially offset by the JGI Acquisition in 2004 and increased purchases of fixed assets. Cash flows provided by financing activities for the nine months ended September 30, 2004 were $65 compared to cash used of $1,164 in the prior year primarily as a result of an increase in short-term borrowings at Logistix and a decrease in the repurchase of treasury stock partially offset by a decrease in proceeds from the exercise of stock options.

Our current strategy and business plan calls for the consummation of additional acquisitions. We plan to evaluate the level of such expenditures in the context of the capital available to us and to changing market conditions.

As of the date hereof, we believe that cash from operations, cash on hand at September 30, 2004 and our credit facility will be sufficient to fund our working capital needs for at least the next twelve months. The statements set forth herein are forward-looking and actual results may differ materially.

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Future minimum annual commitments for guaranteed minimum royalty payments under license agreements, non-cancelable operating leases and employment agreements as of September 30, 2004 are as follows:

We had no material commitments for capital expenditures at September 30, 2004. Letters of credit outstanding as of December 31, 2003 and September 30, 2004 totaled $823 and $3,358, respectively.

Credit Facilities

On April 24, 2001, we signed a credit facility (the “Facility”) with Bank of America. On April 26, 2004, the maturity date of the Facility was extended through June 30, 2005. The credit facility is secured by substantially all of our assets and provides for a line of credit of up to $35,000 with borrowing availability determined by a formula based on qualified assets. Interest on outstanding borrowings will be based on either a fixed rate equivalent to LIBOR plus an applicable spread of between 1.50 and 2.25 percent or a variable rate equivalent to the bank’s reference rate plus an applicable spread of between zero and 0.50 percent. We are also required to pay an unused line fee of between zero and 0.60 percent per annum and certain letter of credit fees. The applicable spread is based on the achievement of certain financial ratios. The Facility also requires us to comply with certain restrictions and covenants as amended from time to time. On November 14, 2001, February 8, 2002, September 30, 2002, November 14, 2003, April 26, 2004, August 12, 2004 and November 15, 2004, certain covenants under the facility were amended. As of September 30, 2004, we were in compliance with the amended restrictions and covenants. In addition to amending certain covenants, the November 15, 2004 amendment imposed a temporary $12,000 cap on total outstanding borrowings and letters of credit. Bank of America will reassess the cap in December 2004. This amendment also increases the maximum interest rate on outstanding borrowings by 0.25 percent. The Facility may be used for working capital and acquisition financing purposes. As of September 30, 2004, there were no amounts outstanding under the Facility except for letters of credit of $3,358.

In addition to the Facility, in October, 2003 our Logistix subsidiary established an import/letter of credit facility with Hong Kong Shanghai Bank Corp. (“HSBC”) to provide short-term financing of product purchases from Asia. The total availability under this facility is 1,000 GBP. Under this facility HSBC may pay Logistix’s vendors directly upon receipt of invoices and shipping documentation. Logistix in turn is obligated to repay HSBC within 120 days. As of December 31, 2003, advances outstanding under this facility totaled approximately $626 and were recorded in short-term debt in the accompanying condensed consolidated balance sheet. As of September 30, 2004, $1,489 was outstanding under this facility.

Acquisitions

On September 3, 2003, we acquired substantially all of the assets of SCI Promotion Group, LLC (“SCI-LLC”), a privately held promotional marketing services company based in Ontario, California (the “SCI Acquisition”). We financed the SCI Acquisition through our existing cash reserves. The SCI Acquisition was consummated pursuant to an Asset Purchase Agreement dated September 3, 2003, by and among EMAK, SCI-LLC and Joseph J. Schmidt, III (the “Purchase Agreement”). Under the terms of the Purchase Agreement, we acquired substantially all of the assets of SCI-LLC for a cash purchase price of approximately $5,900 (before the closing balance sheet working capital adjustment), plus additional earnout consideration of up to $3,500 based upon future performance of the acquired business. Net of a holdback of $250, we paid $5,683 in cash plus related transaction costs of $538. We also assumed the operating liabilities of the business in connection with the acquisition. The earnout consideration is based upon the acquired business achieving targeted levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”) over the period from 2003 through 2006. The earnout payments, if required, are payable 50% in cash and 50% in shares of our common stock. The additional consideration, if any, will be recorded as goodwill. Based on the results for 2003, additional consideration of $800 was earned and recorded as goodwill.

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On February 2, 2004, we acquired certain assets of Johnson Grossfield, Inc. (“JGI-MN”) a privately held promotional marketing services company based in Minneapolis, Minnesota (the “JGI Acquisition”). We financed the JGI Acquisition through our existing cash reserves. The JGI Acquisition was consummated pursuant to an Asset Purchase Agreement dated January 16, 2004, by and among the Company, Johnson Grossfield, Inc., a Delaware corporation wholly owned by us (“JGI”), JGI-MN, Marc Grossfield and Thom Johnson (the “Purchase Agreement”). Under the terms of the Purchase Agreement, we purchased the assets of JGI-MN’s promotional agency business for approximately $4,600 in cash and 35,785 shares of our common stock (which, based upon the January 30, 2004 closing market price of $14.80, had a value of $530), plus additional earnout consideration of up to $4,500 based upon future performance of the acquired business. We also assumed the operating liabilities of the promotional agency business in connection with the acquisition. The earnout consideration is based upon the acquired business achieving targeted levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”) over the period from 2004 through 2008. The earnout payments, if required, are payable 50% in cash and 50% in shares of our common stock. The additional consideration, if any, will be recorded as goodwill.

Issuance of Preferred Stock

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability company (“Crown”), invested $11,900 in EMAK in exchange for preferred stock and warrants to purchase additional preferred stock. Under the terms of the investment, Crown acquired 11,900 shares of Series A mandatory redeemable senior cumulative participating convertible preferred stock, par value $.001 per share, (the “Series A Stock”) with a conversion price of $14.75 per share. In connection with such purchase, we granted to Crown five year warrants (collectively, the “Warrants”) to purchase 5,712 shares of Series B senior cumulative participating convertible preferred stock, par value $.001 per share, (the “Series B Stock”) at an exercise price of $1,000 per share, and 1,428 shares of Series C senior cumulative participating convertible preferred stock, par value $.001 per share, (the “Series C Stock”) at an exercise price of $1,000 per share. The Warrants were immediately exercisable. The conversion prices of the Series B Stock and the Series C Stock were $16.00 and $18.00 per share, respectively. On June 20, 2000, Crown paid us an additional $13,100 in exchange for an additional 13,100 shares of Series A Stock with a conversion price of $14.75 per share. In connection with such purchase, we granted to Crown additional Warrants to purchase another 6,288 shares of Series B Stock and another 1,572 shares of Series C Stock. Each share of Series A Stock is convertible into 67.7966 shares of Common Stock, representing 1,694,915 shares of Common Stock in aggregate. Each share of Series B Stock and Series C Stock was convertible into 62.5 and 55.5556 shares of Common Stock, respectively, representing 916,666 shares of Common Stock in aggregate. Also in connection with such purchase, we agreed to pay Crown a commitment fee in the aggregate amount of $1,250, paid in equal quarterly installments of $62.5 commencing on June 30, 2000 and ending on June 30, 2005. No payment was made during the quarter ended September 30, 2004.

On March 19, 2004, we entered into a Warrant Exchange Agreement with Crown whereby Crown received new warrants to purchase an aggregate of 916,666 shares of Common Stock (“New Warrants”) in exchange for cancellation of the existing Warrants to purchase shares of Series B Stock and Series C Stock (which, upon issuance, would have been convertible into 916,666 shares of Common Stock). The New Warrants consist of warrants to purchase 750,000 shares and 166,666 shares of Common Stock at exercise prices of $16.00 and $18.00 per share, respectively. Of each tranche, 47.6% expire on March 29, 2010 and 52.4% expire on June 20, 2010. As a result of the exchange transaction, Crown received an extension of time in which to exercise its right to purchase additional equity in EMAK, and we obtained an elimination of the preferred rights and preferences as well as the preferred dividend associated with the now eliminated Series B Stock and Series C Stock. The exchange was recorded as a reduction to preferred stock of $531 and an increase to additional paid-in-capital of $487, net of transaction costs of $44.

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

The Series A Stock is subject to mandatory redemption at the option of the holder at 101% of the aggregate Liquidation Preference plus accrued and unpaid dividends if a change in control occurs.

Crown has voting rights equivalent to the number of shares of Common Stock into which their Series A Stock is convertible on the relevant record date. Crown is also entitled to receive a quarterly dividend equal to 6% of the Liquidation Preference per share outstanding, payable in cash. The dividends for the quarter ended September 30, 2004 totaled $375 and were paid in October 2004 and recorded in accounts payable in the accompanying condensed consolidated balance sheet as of September 30, 2004.

Crown currently holds 100% of the outstanding shares of Series A Stock, and has designated one individual to our Board of

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Directors. Crown currently has the right to designate two additional directors.

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

Stock Repurchase

On July 21, 2000, our Board of Directors authorized up to $10,000 for the repurchase of our common stock over a twelve month period. In the period from July 21, 2000 to July 21, 2001, we spent $6,430 to purchase an aggregate of 523,594 shares at an average price of $12.28 per share including commissions. On July 24, 2001, our Board of Directors authorized up to an additional $10,000 for the repurchase of our common stock over a twelve month period. In the period from August 2, 2001 through July 11, 2002, we spent $5,605 to purchase 454,715 shares at an average price of $12.33 per share including commissions. On July 12, 2002, our Board of Directors authorized up to an additional $10,000 for the repurchase of our common stock. We spent $3,505 to repurchase 267,650 shares at an average price of $13.10 per share including commissions under this authorization through September 30, 2004. The duration of the current buyback program is indefinite; provided, however, that our Board of Directors intends to review the program periodically. Purchases are conducted in the open market at prevailing prices, based on market conditions when we are not in a quiet period. We may also transact purchases effected as block trades, as well as certain negotiated, off-exchange purchases not in the open market. Since initiating the overall buyback program on July 20, 2000, we has spent $15,540 to purchase a total of 1,245,959 shares at an average price of $12.47 per share including commissions through September 30, 2004. There were no purchases for the quarter ended September 30, 2004. This repurchase program is being funded through working capital.

Subsequent Event

On November 10, 2004, the Company completed the acquisition of all of the outstanding capital stock of Megaprint Group Limited (“Mega”), a privately held creative promotions agency headquartered in the United Kingdom, for approximately 2.25 million British pounds (approximately US $4.16 million) in cash, plus additional consideration up to a maximum of 2.45 million British pounds based on future performance through 2009. The Company financed the transaction through its existing credit facility with Bank of America. Mega is currently generating approximately $16.0 million in annualized revenue. Founded in 1969 in the Netherlands, Mega provides a wide range of promotional tools and specializes in the creation and production of programs utilizing two-dimensional (“2-D”) premiums for blue-chip corporate clients primarily in Western European markets. Its two largest clients, Kellogg’s and PepsiCo, together generate more than 50% of Mega’s total sales. Other clients include Masterfoods/Mars, Nestlé, Readers Digest, Unilever, Gillette and Danone. Mega has operations in the U.K. and Ireland, the Netherlands, Germany and France, and operates through sales agents in Scandinavia, the Czech Republic and the Middle East.

Recent Accounting Pronouncements

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

In March 2004, the FASB published an Exposure Draft, “Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.” The proposed change in accounting would replace existing requirements under Statement of Financial Accounting Standards (“SFAS”) No. 123 and APB Opinion No. 25. The proposed statement would require public companies to recognize the cost of employee services received in exchange for equity instruments, based on the grant-date fair value of those instruments, with limited exceptions. The proposed statement would also affect the pattern in which compensation cost would be recognized, the accounting for employee share purchase plans, and the accounting for income tax effects of share-based payment transactions. The Exposure Draft also notes that the use of a lattice model, such as the binomial model, to determine the fair value of employee stock options, is preferable. We currently use the Black-Scholes pricing model to determine the fair value of its employee stock options. Use of a lattice model to determine the fair value of employee stock options may result in compensation cost materially different from those pro forma costs disclosed in Note 2 to the consolidated financial statements. The effective date of the proposed standard is for periods beginning after June 15, 2005. We are currently determining what impact the proposed statement would have on our results of operations or financial position.

In November 2003 and March 2004, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The EITF requires a company to apply a three-step model to determine whether an impairment of an investment, within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” is other-than-temporary. EITF Issue No. 03-1 shall be applied prospectively to all current and future investments, in interim or annual reporting periods beginning after June 15, 2004. The adoption of EITF Issue No. 03-1 will not have a material impact on our results of operations or financial position because we do not have any investments in marketable securities as September 30, 2004.

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In April 2004, the EITF reached final consensus on EITF 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” which requires companies that have participating securities to calculate earnings per share using the two-class method. This method requires the allocation of undistributed earnings to the common shares and participating securities based on the proportion of undistributed earnings that each would have been entitled to had all the period’s earnings been distributed. EITF 03-6 is effective for fiscal periods beginning after March 31, 2004 and earnings per share reported in prior periods presented must be retroactively adjusted in order to comply with EITF 03-6. We have adopted EITF 03-6 for the quarter ended June 30, 2004. As a result, earnings per basic common share were reduced by $0.04 for the third quarter of 2003, to $0.13 from $0.17 as reported in the prior year. The earnings per diluted common share were reduced by $0.03 for the third quarter of 2003, to $0.12 from $0.15 as reported in the prior year. The earnings results per basic common share were reduced by $0.13 for the nine months ending September 30, 2003, to $0.45 from $0.58 as reported in the prior year. The earnings results per diluted common share were reduced by $0.13 for the nine months ending September 30, 2003, to $0.42 from $0.55 as reported in the prior year. EITF 03-6 had no impact on 2004 per share amounts because of the net loss.

In September 2004, the consensus of EITF Issue No. 04-10, "Applying Paragraph 19 of FASB Statement No. 131, 'Disclosures about Segments of an Enterprise and Related Information,' in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds," was published. EITF Issue No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. The provisions of EITF Issue No. 04-10 are effective for fiscal years ending after October 13, 2004. We are currently in the process of determining the impact of this consensus on our financial results.

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Cautionary Statements and Risk Factors

Marketplace Risks

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Dependence on a single customer, Burger King, which may adversely affect our financial condition and results of operations.

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Concentration risk associated with accounts receivable. We regularly extend credit to several distribution companies in connection with our business with Burger King and more recently to a subsidiary of Burger King’s purchasing cooperative which is expected to increase to 70% of our sales to the Burger King system by the end of 2004.

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Dependence on nonrenewable product orders by Burger King, which promotions are in effect for a limited period of time.

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Dependence on the popularity of licensed entertainment properties, which may adversely affect our financial condition and results of operations.

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Significant quarter-to-quarter variability in revenues and net income, which may result in operating results below the expectations of securities analysts and investors.

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Increased competitive pressure, which may affect our sales of products and services.

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Dependence on foreign manufacturers, which may increase the costs of our products and affect the demand for such products.

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Variations in product costs due to fluctuations in raw materials prices, including plastic resin.

Financing Risks

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Currency fluctuations, which may affect our suppliers and reportable income.

Other Risks

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Products that we develop or sell may expose us to liability from claims by users of such products for damages including, but not limited to, bodily injury or property damage. We currently maintain product liability insurance coverage in amounts that we believe are adequate. There can be no assurance that we will be able to maintain such coverage or obtain additional coverage on acceptable terms in the future, or that such insurance will provide adequate coverage against all potential claims.

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Exposure to liability for the costs related to product recalls. These costs can include legal expenses, advertising, collection and destruction of product, and free goods. Our product liability insurance coverage generally excludes such costs and damages resulting from product recall.

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Potential negative impact of past or future acquisitions, which may disrupt our ongoing business, distract senior management and increase expenses (including risks associated with the financial condition and integration of the businesses which we acquire).

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Adverse results of litigation, governmental proceedings or environmental matters, which may lead to increased costs or interruption in normal business operations.

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Changes in laws or regulations, both domestically and internationally, including those affecting consumer products or environmental activities or trade restrictions, which may lead to increased costs.

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Strike and other labor disputes which may negatively impact the distribution channels for our products.

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Exposure to liabilities for minimum royalty commitments in connection with license agreements for entertainment properties. We enter into significant minimum royalty commitments from time to time in connection with its consumer products business.

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Potential negative impact of Severe Acute Respiratory Syndrome (“SARS”), which could adversely affect our vendors in the Far East.

We undertake no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstance after the date hereof or to reflect the occurrence of unanticipated events. The risks highlighted herein should not be assumed to be the only items that could affect future performance. In addition to the information contained in this document, readers are advised to review our Form 10-K for the year ended December 31, 2003, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Cautionary Statements and Risk Factors.”

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting the Company, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2003. Our exposure to market risks has not changed materially since December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) , that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2004. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective

There were no changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 2. CHANGE IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

During the third quarter of 2004, EMAK did not purchase any of its common stock.

ISSUER PURCHASES OF EQUITY SECURITIES

In July 2002, EMAK’s board of directors approved a share repurchase program of up to $10,000. Through September 30, 2004, EMAK repurchased 267,650 shares at a cost of $3,505 pursuant to this program. In the nine months ended September 30, 2004, EMAK repurchased 16,550 shares at a cost of $211 pursuant to this program. EMAK’s share repurchase program has no expiration date.

ITEM 6. EXHIBITS

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SIGNATURES

Pursuant to the requirements 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.

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