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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

For the fiscal year ended December 31, 2002

OR

For the transition period from                   to         

Commission File Number 0-23346

EQUITY MARKETING, INC.

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   [X]     No   [  ]

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

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

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

Documents Incorporated by Reference: Certain portions of the Registrant’s definitive Proxy Statement relating to registrant’s annual meeting of stockholders to be held on May 22, 2003 are incorporated by reference into Part III of this Form 10-K.

EQUITY MARKETING, INC.

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

ITEMS IN FORM 10-K

FORWARD-LOOKING STATEMENTS

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

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PART I

ITEM 1.     BUSINESS

($000’s omitted)

General

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

The Company believes its principal competitive advantages are its ability as a full-service agency to both design and implement strategy-based marketing programs, extensive brand-building and sales-building experience developed over years of serving Burger King and other clients, extensive creative capabilities, access to a broad range of intellectual property from the worlds of entertainment, music and sports and an infrastructure that can deliver unique, high-quality and cost-effective products and services in a very tight time frame.

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

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

The Company is seeking to acquire other marketing services companies.

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

Marketing Services

The Company’s largest current marketing services offering is the design and implementation of fully-integrated promotional marketing programs which incorporate products used as free premiums or sold in conjunction with the purchase of meals at Burger King. The Company also produces products and provides related marketing services for use in promotional programs run by its clients. Premium-based promotions are used for marketing purposes by both the companies sponsoring the promotions, typically the Company’s clients, and the licensors of the entertainment, music or sports properties on which the promotional products are based. The use of promotional products based upon entertainment, music or sports properties allows promotion sponsors to draw upon the popular identity developed by the licensed characters through exposure in various media such as television programs, motion pictures and publishing. Promotions are designed to benefit sponsors by generating consumer loyalty, building market share and enhancing the sponsors’ images as providers of value-added products and services. In addition, motion picture and television studio licensors often incorporate such promotions into their own marketing plans because of the substantial advertising expenditures made by sponsors of promotions and because the broad exposure of the licensed property to consumers in the sponsors’ restaurants and other retail outlets supplements the marketing of motion pictures and television programs by the studios.

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

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

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

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

The Company’s principal strategy is to be a market-driven and customer-driven global organization that serves as a strategic marketing partner for its clients through recommending, executing and measuring a broad range of fully integrated brand-building and sales-building programs that may or may not be product-based. The Company also intends to continue to diversify its marketing services client base and to continue to expand its relationship with Burger King. In connection with these strategic goals, the Company acquired Logistix in July 2001, thereby gaining a presence in Europe with broad-based strategic client relationships, including research, new product development, licensing guidance and the development of premium-based promotions; and the Company acquired UPSHOT in July 2002, gaining a marketing agency with expertise in promotion, event, collaborative and environmental marketing. (See Note 4 of the accompanying Notes to Consolidated Financial Statements.)

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

Consumer Products

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Backlog

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

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Manufacturing

The Company’s products are manufactured according to Company and customer specifications by unaffiliated contract manufacturers. Equity Marketing Hong Kong, Ltd., a wholly owned subsidiary of the Company (“Equity Marketing HK”), manages production of the Company’s products by third parties in the Far East and currently is responsible for performing and/or procuring product sourcing, product engineering, quality control inspections, independent safety testing and export/import documentation. The Company believes that the presence of a dedicated staff in Hong Kong results in lower net costs, increased ability to respond rapidly to customer orders and maintenance of more effective quality control standards. The Company’s products are also manufactured by third parties in the United States. Equity Marketing generally retains, for itself or on behalf of its customers, ownership of the molds and tooling required for the manufacture of its products. The Company is not a party to any long-term contractual arrangements with any manufacturer. During 2002, approximately 96% of the Company’s products were manufactured in China. China currently enjoys permanent “normal trade relations” (“NTR”) status under US tariff laws, which provides a favorable category of US import duties. China’s NTR status became permanent on January 1, 2002, following enactment of a bill authorizing such status upon China’s accession to the World Trade Organization, which occurred in December 2001. This substantially reduces the possibility of China losing its NTR status, which would result in increased costs for the Company. There can be no assurance that the Company would be able to source product for the US market from a country other than China without significantly increasing its product cost. (See “Cautionary Statements and Risk Factors.”)

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

Trademarks and Copyrights

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

Competition

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

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

The Company’s consumer products competitors include companies which have far more extensive sales and development staffs and significantly greater financial resources than does the Company. There can be no assurance that the Company will be able to compete effectively against such companies in the future. The Company expects that in 2003 the principal competitors to the Company’s consumer products business will be mid-sized toy companies like Playmates Holdings Limited, Play Along, Inc. and JAKKS Pacific, Inc. However, the toy industry includes major toy and game manufacturers such as Hasbro, Inc. and Mattel, Inc. that compete in some of the same product categories as the Company.

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

Government Regulation

In the United States, the Company is subject to the provisions of, among other laws, the Federal Consumer Product Safety Act and the Federal Hazardous Substances Act (the “Acts”). The Acts empower the Consumer Product Safety Commission (the “CPSC”) to protect the public against unreasonable risks of injury associated with promotional and consumer products, including toys and other articles. The CPSC has the authority to exclude from the market articles which are found to be hazardous and can require a manufacturer to repair or repurchase such toys under certain circumstances. Any such determination by the CPSC is subject to court review. Violations of the Acts may also result in civil and criminal penalties. Similar laws exist in some states and cities in the United States and in many jurisdictions throughout the world. The Company performs quality control procedures (including the inspection of goods at factories and the retention of independent testing laboratories) to ensure compliance with applicable laws.

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

Employees

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

Available Information

The Company’s website address is www.equity-marketing.com. The Company makes available, free of charge, on or through the Company’s website its periodic and current reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Act of 1934 as soon as reasonably practicable after such material is filed with or furnished to the SEC.

ITEM 2.     PROPERTIES

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

ITEM 3.     LEGAL PROCEEDINGS

The Perper Matter

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

General Litigation

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

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

     None.

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PART II

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

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

The Company currently has no plans to pay dividends on its Common Stock. The Company intends to retain all earnings for use in its business. Under the Company’s current credit facility, the Company cannot pay dividends on its Common Stock without the prior consent of the lenders. (See Note 6 of the accompanying Notes to Consolidated Financial Statements.)

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

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ITEM 6.    SELECTED FINANCIAL DATA

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

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

Results of Operations

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

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

Revenues in 2002 increased $62,516, or 43.3%, to $206,832 from $144,316 in 2001. Marketing services revenues increased $58,067, or 49.5%, to $175,372 from $117,305 primarily as a result of increased revenues associated with Burger King programs in 2002 as compared to 2001. This increase was also partially due to marketing services revenues generated by Logistix following its acquisition by the Company in July 2001 and marketing services revenues generated by UPSHOT following its acquisition by the Company in July 2002. Consumer products revenues increased $4,449, or 16.5%, to $31,460 from $27,011 in 2001. This increase is primarily due to increased sales of Robot Wars® product generated by Logistix. The revenue increase was also partially attributable to increased revenues from Scooby-Doo™ product internationally, and was partially offset by decreased sales of Tub Tints® product. The results for 2001 include Logistix from August 1, 2001 (acquired July 31, 2001) and exclude UPSHOT (acquired July 17, 2002). Excluding the impact of acquisitions, revenues increased $33,005, or 24.7%, compared to 2001.

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

Cost of sales, including forgiveness of note receivable (see “Note Receivable” below), increased $48,863 to $152,992 (74.0% of revenues) from $104,129 (72.2% of revenues) in 2001 due primarily to higher revenues in 2002. The gross margin percentage for the year decreased to 26.0% from 27.8% in 2001. This decrease is primarily the result of the charge for the forgiveness of a note receivable of $1,685 (0.8% of revenues) and margin pressure in the marketing services business as a result of shorter program lead times in the first half of 2002 which resulted in increased tooling and freight costs. This decrease was also partially the result of lower Consumer Products margins as a result of an increased mix of lower margin product. This decrease was partially offset by higher margin revenues from Logistix.

Salaries, wages and benefits increased $4,738 in 2002, or 29.8%, to $20,662 (10.0% of revenues) from $15,924 in 2001 (11.0% of revenues). This increase was primarily attributable to the addition of employees from the acquisitions of Logistix and UPSHOT, as well as an accrual for employee performance bonuses. Salaries, wages and benefits decreased as a percentage of revenues from 11.0% to 10.0% as a result of revenues increasing at a greater rate.

Selling, general and administrative expenses increased $4,100 in 2002, or 22.4%, to $22,423 (10.8% of revenues) from $18,323 (12.7% of revenues) in 2001. The increase is primarily the result of higher selling expenses associated with increased sales in 2002. This increase was also attributable to additional operating expenses resulting from the acquisitions of Logistix and UPSHOT, partially offset by the elimination of goodwill amortization as a result of the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (see the discussion of cumulative effect of change in accounting principles below). Selling, general and administrative expenses decreased as a percentage of revenues from 12.7% to 10.8% as a result of revenues increasing at a greater rate.

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

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

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

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

The cumulative effect of change in accounting principles is due to the adoption of SFAS No. 142 which requires that companies no longer amortize goodwill and indefinite life intangible assets, such as trademarks. SFAS No. 142 also requires that companies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EBITDA

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

Financial Condition and Liquidity

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

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

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

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

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

The Company believes that its cash from operations, cash on hand at December 31, 2002 and its credit facility will be sufficient to fund its working capital needs for at least the next twelve months. The statements set forth herein are forward-looking and actual results may differ materially. See “Credit Facilities” below and Note 6 of the accompanying Notes to Consolidated Financial Statements.

Future minimum annual commitments for guaranteed minimum royalty payments under license agreements, non-cancelable operating leases, employment agreements, guaranteed royalty commitments, minimum advertising commitments and letters of credit as of December 31, 2002 are as follows:

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

Credit Facilities

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

Acquisitions

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

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

Issuance of Preferred Stock

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

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

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

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

Crown has voting rights equivalent to the number of shares of Common Stock into which their preferred stock is convertible on the relevant record date. Crown is also entitled to receive a quarterly dividend equal to 6% of the Liquidation Preference per share outstanding, payable in cash. Total dividend for the year ended December 31, 2002 amounted to $1,500, of which $375 was paid in January 2003 and recorded in accounts payable in the accompanying consolidated balance sheet as of December 31, 2002.

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

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

Restructuring

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

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

Stock Repurchase

On July 21, 2000, the Company’s Board of Directors authorized up to $10,000 for the repurchase of the Company’s common stock over a twelve month period. In the period from July 21, 2000 to July 21, 2001, the Company spent $6,430 to purchase an aggregate of 523,594 shares at an average price of $12.28 per share including commissions. On July 24, 2001, the Company’s Board of Directors authorized up to an additional $10,000 for the repurchase of the Company’s common stock over a twelve month period. In the period from August 2, 2001 through July 11, 2002, the Company spent $5,605 to purchase 454,715 shares at an average price of $12.33 per share including commissions. On July 12, 2002, the Company’s Board of Directors authorized up to an additional $10,000 for the repurchase of the Company’s common stock. In the period from July 12, 2002 to December 31, 2002, the Company spent $1,342 to repurchase 107,500 shares at an average price of $12.49 per share including commissions under this authorization. The duration of the current buyback program is indefinite; provided, however, that the Company’s Board of Directors intends to review the program quarterly. Purchases are conducted in the open market at prevailing prices, based on market conditions when the Company is not in a quiet period. The Company may also transact purchases effected as block trades, as well as certain negotiated, off-exchange purchases not in the open market. Since initiating the overall buyback program on July 20, 2000, the Company has spent $13,377 to purchase a total of 1,085,809 shares at an average price of $12.32 per share including commissions, through December 31, 2002. This repurchase program is being funded through working capital.

Inflation

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

Note Receivable

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

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

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

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

Subsequent Events

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

Recent Accounting Pronouncements

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

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

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

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

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

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

Critical Accounting Policies

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

Revenue Recognition

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

Service revenues include all amounts that are billable to clients under service contracts. Service related revenues are recognized on a time and materials basis, or on a straight-line basis, depending on the contract. In the case of fee and production arrangements, the revenues are recognized as the services are performed, which is generally ratably over the period of the client contract. Revenues from time and materials service contracts are recognized as the services are rendered. Revenues from fixed price retainer contracts are recognized on a straight-line basis over the contract term. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable. Reimbursements, including those relating to travel and other out-of-pocket expenses, and other similar third-party costs, such as printing costs, are included in revenues, and an equivalent amount of reimbursable expenses are included in cost of sales. Service revenues for the years ended December 31, 2000, 2001 and 2002 totaled $347, $3,215 and $13,895, respectively. Unbilled revenues represent revenues recognized in advance of billings rendered based on work performed to date on certain service contracts. Unbilled revenues as of December 31, 2001 and 2002 totaled $0 and $230, respectively. Unbilled revenues are recorded in accounts receivable in the accompanying consolidated balance sheet. Unbilled revenues are expected to be billed and collected within the next six months.

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

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

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

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

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

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

The Company records allowances for doubtful accounts receivable and sales returns at the time revenue is recognized based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, retail sell through and customer disputes. When a significant event occurs, such as a bankruptcy filing of a customer, the allowance is reviewed for adequacy and adjusted to reflect the change in estimated receivable impairment. The Company believes that its allowances for doubtful accounts receivable and sales returns at December 31, 2002 are adequate and proper.

Goodwill and Other Intangibles

SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” were approved by FASB effective June 30, 2001 for business combinations consummated after June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method for business combinations and requires use of the purchase method. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization approach to a non-amortization (impairment) approach. The statement requires amortization of goodwill recorded in connection with previous business combinations to cease upon adoption of the statement by calendar year companies on January 1, 2002. The statement required the Company to perform a transitional goodwill impairment test, using values as of the beginning of the fiscal year that SFAS No. 142 is adopted. The Company completed the goodwill transitional impairment test in the second quarter of 2002. As a result, the Company determined that a non-cash charge in the amount of $2,496, net of tax, is required in connection with the goodwill resulting from the 1998 acquisition of Contract Marketing, Inc. and U.S. Import and Promotions Co., collectively referred to as “USI.” The transition charge is reflected as a cumulative effect of change in accounting principles effective January 1, 2002, and therefore, results for the quarter ended March 31, 2002 have been adjusted retroactively. The Company has adopted the provisions of these statements for the acquisition of Logistix effective July 1, 2001 and for all other acquisitions effective January 1, 2002. Accordingly, beginning on January 1, 2002, the Company has foregone all related goodwill amortization expense, which totaled $485, net of tax effect, for the year ended December 31, 2001.

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

Under the provisions of SFAS No. 142, the carrying value of assets acquired, including goodwill, are reviewed annually. During such a review the Company will estimate the fair value of the reporting unit to which the assets were assigned by discounting the reporting unit’s estimated future cash flows before interest. The Company will compare the discounted future cash flows to the carrying value of the acquired net assets to determine if an impairment loss has occurred. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds their estimated fair values. In the fourth quarter of 2002, the Company performed the annual impairment test required by SFAS No. 142 and determined that its goodwill was not impaired as of December 31, 2002.

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

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

Royalties

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

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

Inventories

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

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

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

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

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

Management believes that its allowance for obsolescence at December 31, 2002 is adequate and proper. However, the impact resulting from the aforementioned factors could cause actual results to vary. Any incremental obsolescence charges would negatively affect the results of operations of the Consumer Products business segments.

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Cautionary Statements and Risk Factors

This section is written to be responsive to the Securities and Exchange Commission’s “Plain English” guidelines. In this section the words “we”, “our”, “ours” and “us” refer only to Equity Marketing, Inc. and its subsidiaries and not any other person. Set forth below and elsewhere in this Form 10-K and in other documents we file with the Securities and Exchange Commission are important risks and uncertainties that could cause our actual results of operations, business and financial condition to differ materially from the results contemplated by the forward looking statements contained in this Form 10-K.

We Depend Significantly on One Key Customer

Our success is largely dependent on a single customer, Burger King, which accounted for approximately 80%, 66% and 65% of our revenues for the years ended December 31, 2000, 2001 and 2002, respectively. The termination or a significant reduction by Burger King of its business with us would adversely affect our business. In December 2002, Burger King announced that the Company will retain its role as Burger King’s primary creative and manufacturing agency of record for Burger King’s worldwide premium programs. The Burger King business is also subject to significant year-to-year variability. For instance, the Company’s revenues generated by its business with Burger King dropped from $186,349 in 2000 to $95,405 in 2001 then increased to $133,987 in 2002. The success of our business with Burger King is also partially dependent on the overall success of the Burger King system, whose sales could be negatively impacted by such factors as increased competition, a recent change in ownership and product recalls.

We Rely on the Continued Development of New Promotional Programs

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

We Rely on the Continued Development of New Consumer Products

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

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

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

Our Future Operating Results are Difficult to Predict

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

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Our Business May be Impacted by Adverse General Economic Conditions

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

Our Current Licenses Require Us to Pay Minimum Royalties

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

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

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

We Face Credit Risk

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

Our Markets Are Highly Competitive

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

We Rely on Foreign Manufacturers

During 2002, approximately 95% of our products were manufactured in China. Foreign manufacturing is subject to a number of risks, including transportation delays and interruptions, political and economic disruptions, the imposition of tariffs, quotas and other import or export controls, and changes in governmental policies. We do not have long-term contracts with our foreign manufacturers. Although we believe we could secure other third-party manufacturers to produce our products, our operations would be adversely affected if we lost our relationship with any of our current foreign manufacturers.

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

We Face Foreign Currency Risk

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

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

There Are Risks Associated with Acquisitions

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

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

Donald A. Kurz and Stephen P. Robeck beneficially own approximately 29% and 16%, respectively, of our outstanding Common Stock. Mr. Kurz is our Chairman of the Board and Chief Executive Officer. Mr. Robeck is a member of the Board of Directors. Crown owns 100% of the outstanding shares of the Company’s Series A senior cumulative participating convertible preferred stock, which are convertible into 1,694,915 shares of Common Stock (representing 23% of the outstanding shares of Common Stock on an as converted basis). These stockholders, either individually or acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.

We May Issue Preferred Stock

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

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ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Impact of Interest Rate Changes

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

Impact of Foreign Currency Fluctuation

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

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

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

Bret R. Hadley joined Equity Marketing in July 2001 and is responsible for the Company’s Consumer and Promotional Products division as well as all product realization, including manufacturing, quality control and distribution, as well as management information systems. From November 1999 to May 2001, he was President and CEO of Frank Schaeffer Publications, Inc., an educational products firm. From November 1997 to November 1999, he was President of Wham-O, Inc., a toy and sporting goods manufacturer. From December 1985 to November 1997, he served in various senior leadership positions for Mattel, Inc., including most recently Senior Vice President–International Marketing. He holds a bachelor’s degree from the University of Minnesota and a master’s in business administration from UCLA’s Anderson Graduate School of Management.

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

Ian Madeley joined Equity Marketing in July 2001 and is responsible for the operations of the Company’s subsidiary, Logistix Limited, which the Company acquired on July 31, 2001. Mr. Madeley had been the Managing Director of Logistix since 1989. Prior to joining Logistix, he was the Marketing Manager of SP Agency Stansfield Lake, and prior thereto was a Marketing Manager of New Product Development for Express Foods Group, a leading dairy product supplier. He holds a bachelor’s degree in economics from Hull University.

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

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

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

Teresa L. Tormey joined Equity Marketing in November 2002 as Senior Vice President, General Counsel and Secretary. She is responsible for the Company’s legal, compliance and board administration functions. Ms. Tormey was previously a partner in the corporate finance and transactions practice group of Oppenheimer Wolff & Donnelly LLP. She holds a bachelor’s degree from UC Davis and a juris doctor from Pepperdine University.

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

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

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

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

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

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

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

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

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

ITEM 11.

EXECUTIVE COMPENSATION

Information relating to this item appears under the captions “ELECTION OF DIRECTORS”, “EXECUTIVE COMPENSATION AND RELATED MATTERS” and “REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION” in the Company’s Proxy Statement relating to the Company’s 2003 Annual Meeting of Stockholders, which are incorporated herein by reference.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to this item appears under the caption “ELECTION OF DIRECTORS” in the Company’s Proxy Statement relating to the Company’s 2003 Annual Meeting of Stockholders, which is incorporated herein by reference.

ITEM 14.

CONTROLS AND PROCEDURES

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

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PART IV

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

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

          Financial Statements:

EQUITY MARKETING, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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Report of Independent Accountants

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

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

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

/s/ PricewaterhouseCoopers LLP

Los Angeles, California
February 27, 2003

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

Report of Independent Public Accountants

To Equity Marketing, Inc.:

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

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

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

/s/ ARTHUR ANDERSEN LLP

Los Angeles, California
February 27, 2002

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