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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2002

OR

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to _________

Commission File No. 1-13638

MARVEL ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)

Delaware 13-3711775
(State of incorporation) (I.R.S. employer identification number)

10 East 40th Street
New York, New York 10016
(Address of principal executive offices, including zip code)

(212) 576-4000
(Registrant's telephone number,including area code)

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

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange

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

8% Cumulative Convertible Exchangeable Preferred Stock, par value $.01 per share
12% Senior Notes due 2009

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]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b2). Yes [X] No [ ]

The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of June 28, 2002, the last
business day of the Registrant's most recently completed second fiscal quarter,
was $112,263,724 based on a price of $5.48 per share, the closing sales price
for the Registrant's common stock as reported in the New York Stock Exchange
Composite Transaction Tape on that date. As of March 17, 2003, there were
61,545,753 outstanding shares of the Registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from the Registrant's definitive proxy statement, which the
Registrant intends to file with the Commission not later than 120 days after the
end of the fiscal year covered by this Report.





TABLE OF CONTENTS

PAGE
PART I

ITEM 1. BUSINESS............................................ 1
ITEM 2. PROPERTIES.......................................... 7
ITEM 3. LEGAL PROCEEDINGS................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 8

PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................ 9
ITEM 6. SELECTED FINANCIAL DATA............................. 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................. 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 25

PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT... 25
ITEM 11. EXECUTIVE COMPENSATION............................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ..... 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 25
ITEM 14. CONTROLS AND PROCEDURES.............................. 26

PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K......................................... 26

SIGNATURES.................................................................. 31











i




CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed herein
concerning the Company's business and operations could cause actual results to
differ materially from those contained in forward-looking statements made in
this Form 10-K Annual Report. When used in this Form 10-K, the words "intend",
"estimate", believe", "expect" and similar expressions are intended to identify
forward-looking statements. In addition, the following factors, among others,
could cause the Company's financial performance to differ materially from that
expressed in any forward-looking statements made by the Company:

o A decrease in the level of media exposure or popularity of our characters.
If movies or television programs based upon Marvel characters are not
successful, or if certain Marvel characters lose some of their popularity,
our ability to interest potential licensees in the use of Marvel characters
in general could be substantially diminished, as could the royalties we
receive from current licensees.

o Financial difficulties of licensees. We have granted to a single licensee
an exclusive license for the manufacture and sale of action figures and
accessories and other lines of toys featuring all of our characters other
than those based on movies and TV shows featuring Spider-Man and produced
by Sony. Our royalties from sales of toys could be adversely affected if
that licensee, or any of our other significant licensees, experienced
financial difficulties or bankruptcy.

o Changing consumer preferences. Our new and existing products (and those of
our licensees) are subject to changing consumer preferences. In particular,
products based on feature films are, in general, successfully marketed for
only a limited period of time following the film's release. Existing
product lines might not retain their current popularity or new products
developed by us or our licensees might not meet with the same success as
current products. We and our licensees might not accurately anticipate
future trends or be able to successfully develop, produce and market
products to take advantage of market opportunities presented by those
trends. Part of our strategy (and our licensees') is to make products based
on the anticipated success of feature film releases and TV show broadcasts.
If these releases and broadcasts are not successful, these products may not
be sold profitably or even at all.

o Movie- and television-production delays and cancellations. We do not
control the decision to proceed with the production of films and television
programs based on our characters or the timing of releases of those films
and programs. Delays or cancellations of proposed films and television
programs could have an adverse effect on our business. Dates expressed in
this Annual Report on Form 10-K for the anticipated release of films and
launch dates for television programs are anticipated dates only and those
dates could be delayed or, in some instances, even cancelled.

o Toy-production delays or shortfalls, continued concentration of toy
retailers and toy inventory risk. The retail toy business is highly
concentrated. The five largest customers for the toy products which we
continue to have manufactured for ourselves accounted, in the aggregate,
for approximately 66% of our total toy sales in 2002. An adverse change in,
or termination of, the relationship between us or our major toy-producing
licensee and one or more of our major customers could have a material
adverse effect on us. In addition, the bankruptcy or other lack of success
of one or more of our significant retailers could decrease our earnings.
Although our inventory risk has been lowered since 2001, our production of
excess products to meet anticipated retailer demand could still result in
markdowns and increased inventory carrying costs for us on even our most
popular items. If we fail to anticipate a high demand for our products,
however, we face the risk that we may be unable to provide adequate
supplies of popular toys to retailers in a timely fashion, particularly
during the Christmas season, and may consequently lose sales.

o The imposition of quotas or tariffs on products manufactured in China. A
large number of our licensees' products (whose sales may entitle us to
royalty payments), and the toys which continue to be manufactured on our
account, are manufactured in China, which subjects us to risks of currency
exchange fluctuations, transportation delays and interruptions, and


ii


political and economic disruptions. Our ability, and that of our licensees,
to obtain products from Chinese manufacturers is dependent upon the United
States' trade relationship with China. The impositon of trade sanctions on
China could result in significant supply disruptions or higher merchandise
costs to us. We and our licensees might not be able to find alternate
sources of manufacturing outside China on acceptable terms even if we want
or need to. Our inability or our licensees' inability to find those
alternate sources could have a material adverse effect on us.

o A decrease in cash flow even as we remain indebted to our noteholders. We
are required to pay approximately $18 million per year in interest on our
senior notes. A decrease in our cash flow could impair our ability to pay
that interest. If we do not pay interest on our senior notes when we are
required to do so, the holders of those notes could cause them to become
immediately payable in full.

These forward-looking statements speak only as of the date of this report.
We do not intend to update or revise any forward-looking statements to reflect
events or circumstances after the date of this report, including changes in
business strategy or planned capital expenditures, or to reflect the occurrence
of unanticipated events.


iii



PART I


ITEM 1. BUSINESS

Unless the context otherwise requires, the term "the Company" and the term
"Marvel" each refer to Marvel Enterprises, Inc., a Delaware corporation, and its
subsidiaries. Certain of the characters and properties referred to in this
Report are subject to copyright and/or trademark protection.


Background

On October 1, 1998, the Company, then known as Toy Biz, Inc., acquired
Marvel Entertainment Group, Inc. ("MEG") out of of bankruptcy and the Company
changed its name to "Marvel Enterprises, Inc." Prior to that acquisition, MEG
was a principal stockholder of the Company and the Company held a license to
manufacture and sell toys based on Marvel characters.


General

The Company is one of the world's most prominent character-based
entertainment companies, with a proprietary library of over 4,700 characters.
The Company operates in the licensing, comic book publishing and toy businesses
in both domestic and international markets. The Company's library of characters
includes Spider-Man, X-Men, The Incredible Hulk, Daredevil, Captain America,
Fantastic Four (including Mr. Fantastic, Human Torch, Invisible Woman and The
Thing), Thor, Silver Surfer, Iron Man, Dr. Strange, and Ghost Rider, and is one
of the oldest and most recognizable collections of characters in the
entertainment industry.

The Company's business is divided into three integrated and complementary
operating segments: its licensing segment ("Marvel Licensing"), publishing
segment ("Marvel Publishing") and toy segment ("Toy Biz"). For financial
information about Marvel's segments, see Note 15 to the attached financial
statements.

The Company and Sony Pictures Consumer Products Inc. have entered into a
joint venture, called Spider-Man Merchandising LP, for the purpose of pursuing
licensing opportunities relating to characters based upon movies or television
shows featuring Spider-Man and produced by Sony Pictures Entertainment Inc.
("Sony Pictures"). The joint venture's current fiscal year ends on March 31,
2003. The Company will file audited financial statements of the joint venture as
an amendment to this Annual Report on Form 10-K within 90 days of that date, in
accordance with Rule 3-09 of Regulation S-X.

Marvel Licensing

The Company's Marvel Licensing division licenses the Company's characters
for use in a wide variety of products, including toys, electronic games,
apparel, accessories, footwear, collectibles and novelties. Marvel Licensing
also receives fees from the sale of licenses to a variety of media, including
feature films, television programs and destination-based entertainment, and from
the sale of licenses for promotional use.

Feature Films

The Company has licensed Marvel characters for worldwide use in motion
pictures. For example, the Company currently has licenses with Sony Pictures to
produce motion pictures featuring Spider-Man, with Twentieth Century Fox to
produce motion pictures featuring X-Men and Fantastic Four, with Universal to
produce a motion picture featuring The Incredible Hulk scheduled for release in
June 2003 and with New Regency to produce a motion picture, released on February
14, 2003, featuring Daredevil. One X-Men film was released during July 2000 and
a sequel is presently scheduled to be released in May 2003. Spider-Man: The
Movie was released in May 2002 and a sequel is presently scheduled to be
released in May 2004. Marvel has other outstanding licenses with film studios
for a number of its other characters. Under these licenses, the Company
generally retains control over merchandising rights and receives not less than
50% of merchandising-based revenue.

1


Television Programs

The Company licenses Marvel characters for use in television programs. In
2000, Marvel Licensing began production of X-Men Evolution, a half-hour animated
show. This is distributed by Warner Brothers and currently appears on the WB
Kids! network and foreign television stations. In 2001, a live action show
entitled Mutant X began airing on syndicated television. The newest Marvel
program is a half-hour animated show, produced by Sony Pictures, featuring
Spider-Man. This show is scheduled for airing in Summer 2003 on MTV in the
United States, and is being marketed for international distribution.

Destination-Based Entertainment

The Company licenses Marvel characters for use at theme parks, shopping
malls and special events. For example, Marvel has licensed the Company's
characters for use as part of the Islands of Adventure theme park in Orlando,
Florida (since 1999) and for use in an attraction, still under development, at
the Universal Studios theme park in Osaka, Japan. Another example is the
Spider-Man Stunt Show now touring major markets and playing in theatre venues.

Toy Merchandise

In July 2001, the Company entered into a five and one-half year exclusive
licensing agreement with an unrelated Hong Kong company, Toy Biz Worldwide, Ltd
("TBW"), for the sale and manufacture of toy action figures and accessories, and
other toys, that feature Marvel characters other than those based upon movies or
television shows featuring Spider-Man and produced by Sony Pictures. TBW is
using the Toy Biz name for marketing purposes but Marvel has neither an
ownership interest in TBW nor any financial obligations or guarantees related to
TBW. The agreement represented a strategic decision by the Company to eliminate
much of the risk and investment previously associated with the direct
manufacture and sale of these lines of toys while enabling Marvel to participate
in their success through ongoing licensing fees. Toy Biz does product design,
marketing and sales for TBW and is reimbursed for these expenses.

Consumer Products

Marvel licenses its characters for use in a wide variety of consumer
products, including apparel, interactive games, electronics, stationery, gifts
and novelties, footwear, collectibles and advertising.

Promotions

Marvel licenses its characters for use by companies for short term tie-in
promotions that are executed in forms such as premium programs, sweepstakes and
contests to consumers and/or the company's trade market. In March 2003, the
Company announced an international licensing agreement with Pepsi-Cola
International, under which Pepsi will introduce hundreds of thousands of
Marvel-themed soft-drink packages throughout Europe, Asia and other territories.

Marvel Publishing

Marvel Publishing has been publishing comic books since 1939. Marvel
Publishing's titles feature classic Marvel super heroes, newly developed Marvel
characters, and characters created by other entities and licensed to Marvel
Publishing. Marvel's characters have been developed through a long history of
comic book plots and storylines which give each of them their own personality,
context and depth.

Marvel Publishing's approach to the Marvel characters is to present a
contemporary drama suggestive of real people with real problems. This enables
the characters to evolve, remain fresh, and, therefore, attract new and retain
old readers in each succeeding generation. The Company's characters exist in the
"Marvel Universe," a fictitious universe which provides a unifying historical
and contextual background for the characters and storylines. The "Marvel
Universe" concept permits Marvel Publishing to use the popularity of its
characters to introduce a new character in an existing Marvel super heroes comic
book or to develop more fully an existing but lesser known character. In this
manner, formerly lesser known characters such as Thunderbolts and Wolverine have
been developed and are now popular characters in their own right and are
featured in their own monthly comic books. The "Marvel Universe" concept also

2


allows Marvel Publishing to use its more popular characters to make "guest
appearances" in the comic books of lesser-known or newer characters to attempt
to increase the circulation of a particular issue or issues.

In 2001, Marvel cut back on the number of expensive, exclusive agreements
with writers and artists while establishing new relationships with some of the
industry's hottest creators, as well as recruiting from outside the industry.
Starting in 2001, Marvel eliminated the costly and inefficient process of
hand-coloring books in favor of higher quality, less expensive, computer
coloring.

Customers, Marketing and Distribution

Marvel Publishing's primary target market for its comic books has been
teenagers and young adults in the 13 to 23 year old age group. Established
readership of Marvel Publishing's comic books also extends to readers in their
mid-thirties. There are two primary purchasers of Marvel Publishing's comic
books. One is the traditional purchaser who buys comic books like any other
magazine. The other is the reader-saver who purchases comic books, typically
from a comic book specialty store, and maintains them as part of a collection.

Marvel Publishing's comic book publications are distributed through three
channels: (i) to comic book specialty stores on a non-returnable basis (the
"direct market"), (ii) to traditional retail outlets, including bookstores and
newsstands, on a returnable basis (the "mass market") and (iii) on a
subscription sales basis.

For the years ended December 31, 2000, 2001 and 2002, approximately 77%,
80% and 76%, respectively, of Marvel Publishing's net revenues were derived from
sales to the direct market. Marvel Publishing distributes its publications to
the direct market through an unaffiliated entity which, in turn, services
specialty market retailers and direct market comic book shops. In 2002, Marvel
continued its historical policy of printing to order for the direct market, thus
eliminating the cost of printing and marketing excess inventory. In recent
years, collector interest in Marvel has revived and has increased consumer
traffic in the direct market. The revived interest has been instrumental in not
only stimulating market growth but also increasing sales in Marvel's trade
paperback collections. Marvel's trade paperbacks are compilations of previously
printed material collected to tell a "complete" story. As monthly periodicals
continued to sell out in 2001 and again in 2002, Marvel experienced an increase
in demand for the compilations permitting Marvel to achieve a leadership role in
the category of trade paperbacks.

For the years ended December 31, 2000, 2001 and 2002, approximately 9%, 10%
and 14%, respectively, of Marvel Publishing's net revenues were derived from
sales to the mass market. The increase in 2002 was due partly to increased
demand for, and an aggressive push by the Company of, trade paperbacks to the
bookstore market. This business, which puts trade paperbacks into the mass
market and in front of general consumers, grew more than fivefold from 2001 to
2002. The Company believes that there is still a great deal of growth in this
market for these products, and that this is one of the better ways to attract
new readers to Marvel Publishing.

Subscription sales average approximately 2% to 3% of Marvel Publishing's
net revenues.

In addition to revenues from the sale of comic books, Marvel Publishing
derives revenues from sales of advertising and other publishing activities such
as custom comics. For the years ended December 31, 2000, 2001 and 2002,
approximately $5.5 million, $3.5 million and $5.3 million, respectively, of
Marvel Publishing's net revenues were derived from those sources. In most of
Marvel Publishing's comic publications, ten pages (three glossy cover pages and
seven inside pages) are allocated for advertising. Marvel Publishing permits
advertisers to advertise in a broad range of Marvel Publishing's comic book
publications or to advertise in specific groups of titles whose readership's age
is suited to the advertiser.

Toy Biz

Toy Biz designs, develops, markets and distributes a limited line of toys
to the worldwide marketplace. Toy Biz's products are based upon movies and
television shows featuring Spider-Man and produced by Sony Pictures, and upon
the movie trilogy Lord of the Rings. Toy Biz also does the design, development,
marketing and sales services for TBW for which it is reimbursed by TBW for its
direct costs. The Spectra Star division of Toy Biz (which is presently scheduled
to be closed mid-2003) designed, produced and sells kites in both the mass
market stores and specialty hobby shops.

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The toy industry is a highly competitive environment in which large mass
market toy retailers dominate the industry and feature a large selection of
toys. In recent years, entertainment conglomerates, through films, television
shows, video games, the internet and print products, have emerged as important
content providers for toy manufacturers. In addition, continued consolidation
among discount-oriented retailers can be expected to require toy companies to
keep prices low and to implement and maintain production and inventory control
methods permitting them to respond quickly to changes in demand. In addition to
the competitive pressures placed on manufacturers and distributors, the toy
industry is subject to changing consumer preferences and significant seasonal
patterns in sales.

During 2000, 2001 and 2002, the only line of products to account for more
than 10% of the Company's net revenue was the line of toys based upon
Spider-Man: The Movie, whose sales accounted for approximately 37% of the
Company's net revenue in 2002.

Products

While Toy Biz has historically marketed a variety of toy products designed
for children of different age groups, its current product strategy is to focus
sales primarily on toys based on the characters in Spider-Man: The Movie and the
animated TV show featuring Spider-Man, and in the Lord of the Rings trilogy. Toy
Biz products are aimed primarily at boys ages 4-12 and collectors.

Boys' Products. In 2001 and 2002, Toy Biz developed a line of action
figures, accessories and role play items based upon the Lord of the Rings movie
trilogy produced by New Line Cinema (a division of AOL/Time Warner). The first
two pictures were released in December 2001 and December 2002 and the third film
is scheduled to be released during Holiday 2003. In addition, Toy Biz developed
a line of action figures, accessories and role play items based on the
characters in Spider-Man: The Movie which was released in May 2002.

Design and Development

Toy Biz maintains a product development staff and also obtains new product
ideas from third-party inventors. The time from concept to production of a new
toy can range from six to twelve months, depending on product complexity.

Toy Biz relies on independent parties in China to manufacture most of its
products. Toy Biz uses Acts Testing Labs (H.K.) Ltd., a leading independent
quality-inspection firm, to maintain close contact with its manufacturers and
subcontractors in China and to monitor quality control of Toy Biz products. Toy
Biz uses an affiliate of Acts Testing Labs (H.K.) Ltd. to provide testing
services for a limited amount of product currently produced in the United
States.

Customers, Marketing and Distribution

Toy Biz markets and distributes its products in the United States and
internationally, with sales to customers in the United States accounting for
approximately 72%, 77% and 77% of the Company's net toy sales in 2000, 2001 and
2002, respectively.

Outlets for Toy Biz's products in the United States include specialty toy
retailers, mass merchandisers, mail order companies and variety stores, as well
as independent distributors who purchase products directly from Toy Biz and ship
them to retail outlets. The Company's customer base for toys is concentrated.
Toy Biz's five largest customers are Wal-Mart Stores, Inc., Toys 'R' Us, Inc.,
Target Stores, Inc., a division of Target Corp., Kay-Bee Toy Stores and Kmart
Corporation, which accounted in the aggregate for approximately 60%, 56% and 66%
of the Company's total toy sales in 2000, 2001 and 2002, respectively.

Toy Biz has traditionally produced its products for foreign customers to
order, and sold them "FOB" the place of manufacture; starting in 2001, in an
effort to lower its inventory risk, Toy Biz behan selling most of its products
on that basis to its domestic customers as well. When Toy Biz sells products
"FOB" place of manufacture, title to the products, along with risk of loss,
passes to the customer in the Far East, where Toy Biz products are manufactured.
As a result of this change in sales terms and of the licensing to TBW of most
toy lines previously manufactured and sold by Toy Biz, Toy Biz today maintains
far

4


less inventory than before 2001. Among the advantages of maintaining less
inventory is that Toy Biz reduces its risk of producing more products than can
be sold; among the disadvantages is that Toy Biz increases its risk of having
fewer products available, in the event of unforeseen demand, than might have
otherwise been sold.

Under an agreement with TBW, Toy Biz provides services to TBW as sales
representative.

Intellectual Property

The Company believes that its library of proprietary characters as well as
its "Marvel" trade name represent its most valuable assets and that its library
could not be easily replicated. The Company currently conducts an active program
of maintaining and protecting its intellectual property rights in the United
States and in approximately 55 foreign countries. The Company's principal
trademarks have been registered in the United States, certain of the countries
in Western Europe and Latin America, Asia including many Pacific Rim countries,
the Middle East and Africa. While the Company has registered its intellectual
property in these countries, and expects that its rights will be protected in
these countries, certain other countries do not have intellectual property laws
that protect United States holders of intellectual property and there can be no
assurance that the Company's rights will not be violated or its characters
"pirated" in these countries.

Advertising

Although a portion of the Company's advertising budget for its toy products
is expended for newspaper advertising, magazine advertising, catalogs and other
promotional materials, the Company allocates a majority of its advertising
budget for its toy products to television promotion. The Company advertises on
national television and purchases advertising spots on a local basis. Management
believes that television programs underlying the Company's toy product lines
increases exposure and awareness.

The Company currently engages Tangible Media, Inc. on a purchase-order
basis to purchase most of its advertising. Tangible Media, Inc. is an affiliate
of Isaac Perlmutter. Mr.Perlmutter is Vice Chairman of the Company's Board of
Directors, an employee of the Company and the Company's largest stockholder. The
Company retains the services of a media consulting agency for advice on matters
of advertising creativity.

Competition

The industries in which the Company competes are highly competitive.

Marvel Licensing competes with a diverse range of entities which own
intellectual property rights in characters. These include D.C. Comics (which is
owned by AOL Time Warner, Inc.), The Walt Disney Company, Vivendi Universal and
other entertainment-related entities. Many of these competitors have greater
financial and other resources than the Company.

Marvel Publishing competes with over 500 publishers in the United States.
Some of Marvel Publishing's competitors, such as D.C. Comics, are part of
integrated entertainment companies and may have greater financial and other
resources than the Company. Marvel Publishing also faces competition from other
entertainment media, such as movies and video games, but management believes
that it benefits from the low price of comic books in relation to those other
products.

Toy Biz competes with many larger toy companies in the design and
development of new toys, the procurement of licenses and for adequate retail
shelf space for its products. The larger toy companies include Hasbro, Inc.,
Mattel Inc., and Jakks Pacific. Many of these competitors have greater financial
and other resources than the Company. The toy industry's highly competitive
environment continues to place cost pressures on manufacturers and distributors.
Discretionary spending among potential toy consumers is limited and the toy
industry competes for those dollars along with the makers of computers and video
games. Management believes that strong character and product licenses, the
industry reputation and ability of its senior management, the quality of its
products and its overhead and operational controls have enabled the Company's
Toy Biz division to compete successfully.


5


Employees

As of December 31, 2002, the Company employed approximately 200 persons
(including operations in Hong Kong but excluding operations in Mexico (169
employees), which are scheduled to be closed in mid-2003. The Company also
contracts for creative work on an as-needed basis with over 500 active freelance
writers and artists. The Company's employees are not subject to any collective
bargaining agreements. Management believes that the Company's relationship with
its employees is good.

Financial Information about Geographic Areas

The following table sets forth revenues from external customers attributed
to geographic areas:




Revenue by Geographic Area
(in thousands)
2000 2001 2002
............................. ............................ ............................

U.S. Foreign U.S. Foreign U.S. Foreign*


Licensing $ 13,342 $ 5,817 $ 30,309 $ 9,703 $ 47,565 $ 31,997
Publishing 36,826 8,357 40,685 8,819 53,678 10,823
Toys 120,378 46,931 70,996 20,712 118,873 36,110
-------- -------- -------- -------- -------- --------
Total $170,546 $ 61,105 $141,990 $ 39,234 $220,116 $ 78,930
======== ======== ======== ======== ======== ========


* $21,807 of the 2002 Licensing Foreign total is attributable to revenues
generated in Hong Kong.

Government Regulations

The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Product Safety Commission (the "CPSC") to protect children
from hazardous toys and other articles. The CPSC has the authority to exclude
from the market articles which are found to be hazardous. Similar laws exist in
some states and cities in the United States, Canada and Europe. The Company
maintains a quality control program (including the inspection of goods at
factories and the retention of an independent quality-inspection firm) designed
to ensure compliance with applicable laws.

The Acquisition of MEG

In connection with the Comany's acquisition of MEG out of bankruptcy in
October, 1998, the Company agreed to pay in cash all administration expense
claims incurred in connection with MEG's bankruptcy case (the "Administration
Expense Claims"). Through 1999, the Company paid $33.9 million of Administration
Expense Claims. During 2000, 2001 and 2002, the Company paid approximately $2.1
million, $0.5 million and $2.2 million, respectively, of additional
Administration Expense Claims. The Company estimates that it may be required to
pay approximately $1.3 million of additional Administration Expense Claims,
although there can be no assurance as to the amount the Company will be required
to pay.

In accordance with MEG's bankruptcy plan of reorganization under which the
Company acquired MEG (the "Plan"), two litigation trusts were formed on the
consummation date of the Plan. Each litigation trust is the legal owner of
litigation claims that formerly belonged to MEG and its subsidiaries. The
primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to
pursue bankruptcy avoidance claims. The primary purpose of the other trust (the
"MAFCO Litigation Trust") is to pursue certain litigation claims against Ronald
O. Perelman and various related entities and individuals. The Company agreed to
lend up to $1.1 million to the Avoidance Litigation Trust and up to $1 million
to the MAFCO Litigation Trust, in each case on a revolving basis to fund the
trust's professional fees and expenses. Each litigation trust is obligated to
reimburse the Company for all sums advanced, with simple interest at the rate of
10% per year. Net litigation proceeds of each trust will be distributed to the
trust's beneficiaries only after the trust has, among other things, paid all
sums owed to the Company, released the Company from any further obligation to
make loans to the trust, and established reserves to satisfy indemnification
claims. The Company is entitled to 65.1% of net litigation proceeds from the
Avoidance Litigation Trust. The Company is not entitled to any net litigation
proceeds from the MAFCO Litigation Trust.

6


Carl C. Icahn and High River Limited Partnership and Vincent Intrieri and
Westgate International L.P. entered into standstill agreements with the Company
on the consummation date of the Plan. The Standstill Agreements terminated on
October 1, 2002.

Available Information

Marvel's Internet address is www.marvel.com. Marvel's annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports are available, free of charge, on our Internet
website, and are posted there as soon as reasonably practicable after we
electronically file them with the Securities and Exchange Commission.


ITEM 2. PROPERTIES


The Company has the following principal properties:

Facility Location Square Feet Owned/Leased
- ----------------------------------------------- ------------------------ ------- ------------

Office (1) New York, New York 64,300 Leased
Office/Showroom (2)(3) New York, New York 14,100 Leased
Office/Warehouse (2) Yuma, Arizona 80,000 Owned
Warehouse (2) Fife, Washington (4) Leased
Manufacturing (2)(5) San Luis, Mexico 190,000 Owned
Office (3) Santa Monica, California 4,900 Leased

(1) Used by all segments of the Company.
(2) Used by the Company's toy segment.
(3) Used by the Company's licensing segment.
(4) The lease payments associated with the warehouse in Fife, Washington, are
based on cubic feet, measured monthly, and are subject to change depending on
the capacity devoted to the inventory stored at this location.
(5) Effective April 1, 2003, the property in San Luis, Mexico will be leased by
the Company to an unaffiliated party.



ITEM 3. LEGAL PROCEEDINGS

The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.

Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character. In February 2002, the Court granted the Company's motion for
summary judgment. Simon appealed the Court's decision and the hearing on the
appeal was held in June 2002. On November 7, 2002, the United States Court of
Appeals for the Second Circuit reversed the decision of the United States
District Court for the Southern District of New York, which had granted the
Company's motion for summary judgment and remanded the action to the District
Court for trial. A non-jury trial is scheduled to begin on July 16, 2003.

7


X-Men Litigation. In April 2001, Twentieth Century Fox Film Corporation
("Fox") sued Marvel, Tribune Entertainment Co., Fireworks Communications, Inc.
and Fireworks Television (US), Inc. in the United States District Court,
Southern District of New York, seeking an injunction and damages for alleged
breach of the 1993 X-Men movie license, unfair competition, copyright
infringement and tortious interference with a contract arising from the Mutant X
television show being produced by Tribune and Fireworks under license from
Marvel which was released in the fall of 2001. On the same day Fox filed the
foregoing suit, Marvel commenced an action against Fox in the same court seeking
a declaratory judgment that the license of the Mutant X title and certain Marvel
characters did not breach the 1993 X-Men movie license with Fox. Both suits were
consolidated. The case was settled in February 2003. The settlement included an
extension of time during which Fox may exploit its rights in the "X-Men",
"Daredevil", and "Fantastic Four" properties. Additionally, the settlement
expanded the relationship between Fox and Marvel whereby the parties will
negotiate up to three new film and television deals for additional Marvel
properties during the next two years.

MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company filed an appeal. The Company entered into negotiations and
settled the case in early 2003 at an amount not in excess of the amount provided
for in the accompanying consolidated financial statements.

Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company and Marvel Entertainment Group, Inc. (the "Marvel Defendants") in New
York Supreme Court, County of New York, alleging that the Marvel Defendants
breached their own Terms of Sale Agreement in connection with the sale of comic
books to members of the purported class, breached their obligation of good faith
and fair dealing(s), fraudulently induced plaintiff and other members of the
purported class to buy comics and unjustly enriched themselves. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. Marvel intends vigorously to defend against the claims made
in this action on their merits.

Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced his previously
threatened action in the United States District Court for the Southern District
of New York, alleging claims for breach of his November 1, 1998 employment
agreement. Mr. Lee claims the right to a 10% profit participation in connection
with the Spider-Man movie and other film and television productions that utilize
Marvel characters. Pursuant to the terms of the Employment Agreement, the
Company is currently paying Mr. Lee a salary of $1 million per year and believes
that Mr. Lee's claim is without merit. Marvel has answered the complaint and
denied all material allegations.

Administration Expense Claims Litigation. While the Company has settled
substantially all Administration Expense Claims, litigation brought by the
Company to contest some of those claims is still pending. The Company estimates
that it may be required to pay approximately $1.3 million of additional
Administration Expense Claims, although there can be no assurance as to the
amount the Company will be required to pay. At December 31, 2002, the Company
had reserves (established 1998)of $1.3 million for this purpose.

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

The only matters submitted to a vote of security holders during the fourth
quarter of 2002 were those voted upon at the Company's Annual Meeting of
Stockholders held on October 15, 2002. At the meeting, (i) Sid Ganis and James
Halpin were elected as directors and (ii) the appointment of Ernst & Young LLP
as the Company's independent accountants for the fiscal year ending December 31,
2002 was ratified.

For the election of Sid Ganis to the board of directors, votes cast at the
meeting were 52,152,913 "For" and 206,680 withheld; for the election of James F.
Halpin to the board of directors, votes cast were 51,469,947 "For" and 889,646
withheld; and for the ratification of the appointment of Ernst & Young LLP as
the Company's independent accountants for the fiscal year ending December 31,
2002, votes cast were 52,259,479 "For" and 73,375 "Against," with 26,738 votes
abstaining. There were no broker non-votes.

8




PART II

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

The following table sets forth, for each fiscal quarter indicated, the high
and low closing prices for the Company's common stock as reported in the New
York Stock Exchange Composite Transaction Tape.



Fiscal Year High Low
- -------------------------------------------- -------- --------
2001
First Quarter $ 2.88 $ 1.44
Second Quarter $ 3.58 $ 1.79
Third Quarter $ 4.03 $ 1.90
Fourth Quarter $ 4.15 $ 2.24

2002
First Quarter $ 8.35 $ 3.55
Second Quarter $ 9.15 $ 4.70
Third Quarter $ 7.15 $ 4.15
Fourth Quarter $ 9.40 $ 6.00



As of March 17, 2003, there were 20,271 holders of record of the Company's
common stock.

The Company has not declared any dividends on the common stock. The
indenture governing the Company's senior notes restricts the Company's ability
to pay dividends on the common stock. See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.

The following table sets forth the securities authorized for issuance under
the Company's equity compensation plan.




- -----------------------------------------------------------------------------------------------
Equity Compensation Plan Information as of December 31, 2002
- -----------------------------------------------------------------------------------------------

Number of Weighted Number of
securities to be average securities remaining
issued upon exercise price available for future
exercise of of outstanding issuance under
outstanding options, warrants equity compensation plans
options, warrants and rights (excluding securities
and rights reflected in column (a))
------------------ ---------------- ------------------------


Plan Category (a) (b) (c)

Equity compensation plans 10,843,502 $ 5.00 4,542,916
approved by security
holders

Equity compensation plans
not approved by security
holders -- -- --

Total 10,843,502 $ 5.00 4,542,916



9


Recent Sales of Unregistered Securities

Exchange Offer

On October 7, 2002, the Company commenced an offer to exchange any or all
of its outstanding 8% Cumulative Convertible Exchangeable Preferred Stock, par
value $.01 per share (the "8% Preferred Stock") for newly issued shares of
common stock at an exchange rate of 1.39 shares of common stock for each share
of 8% Preferred Stock tendered (the "Exchange Offer"). This rate of exchange was
higher than the rate set forth under the terms of 8% Preferred Stock, which is
1.039 shares of common stock for each share of 8% Preferred Stock. The Exchange
Offer was completed on November 18, 2002, at which time 17,594,937 shares of 8%
Preferred Stock were tendered resulting in the issuance of 24,456,962 shares of
common stock to tendering stockholders. As a result of the Exchange Offer, the
Company recorded a non-cash charge of approximately $55.3 million (representing
the fair value of the additional shares of common stock issued in the Exchange
Offer: the shares, in other words, additional to what would have been issued had
the exchange rate been 1.039) as a preferred dividend.

The shares of common stock were offered pursuant to the exemption from the
registration requirements of the Securities Act under Section 3(a)(9) of the
Securities Act. The Exchange Offer was made exclusively to existing holders of
8% Preferred Stock and no commission or other remuneration was paid or given
directly or indirectly for soliciting the Exchange Offer.

Issuances in Connection with the HSBC Credit Facility and Office Lease

As consideration for the establishment of its credit facility with HSBC
Bank USA (the "HSBC Credit Facility"), on November 30, 2001, the Company granted
to HSBC Securities (USA), Inc. ("HSBC Securities") five-year warrants to
purchase up to 750,000 shares of common stock at $3.62 per share (the "HSBC
Warrants"). The HSBC Warrants were offered pursuant to the exemption from the
registration requirements of the Securities Act under Rule 506 of Regulation D.

HSBC has exercised all of the HSBC Warrants. On December 18, 2002, HSBC
exercised 500,000 HSBC Warrants in a cashless exercise for 295,110 newly issued
shares of common stock (based on a 20-day mean price per share as of that date
of $8.834). On February 6, 2003, HSBC paid to the Company $905,000 and exercised
the remaining 250,000 HSBC Warrants in exchange for 250,000 shares of common
stock. The shares of common stock issued were offered pursuant to the exemption
from the registration requirements of the Securities Act under Rule 506 of
Regulation D.

Also in connection with the HSBC Credit Facility, Isaac Perlmutter entered
into a Guaranty and Security Agreement whereby Mr. Perlmutter agreed to guaranty
payment of a portion of the Company's obligations under the HSBC Credit
Facility. In consideration of the Guaranty and Security Agreement and Mr.
Perlmutter's guaranty of up to a maximum of $4,365,000 of the Company's
obligations under its lease for its executive offices, on January 31, 2002, the
Company issued to Mr. Perlmutter five-year warrants to purchase 4,603,309
million shares of common stock at $3.11 per share, which were immediately
exercisable. The warrants were offered pursuant to the exemption from the
registration requirements of the Securities Act under Rule 506 of Regulation D.

Recent Development

On March 19, 2003, the Company announced that it will convert all remaining
approximately 3.3 million outstanding shares of 8% Preferred Stock at the stated
conversion rate of 1.039 shares of the Company's common stock per each share of
8% Preferred Stock.

Under the terms of the 8% Preferred Stock, the Company is able to force the
conversion of all outstanding shares of 8% Preferred Stock following the
completion of 10 consecutive trading days on which the closing price of the
Company's common stock exceeds $11.55 per share. March 18, 2003 marked the 10th
consecutive trading day on which the Company's common stock's closing price met
this criterion. The Company will issue approximately 3.5 million shares of
common stock in the conversion, which is expected to be effective on March 30,
2003. The conversion will increase the trading float and liquidity of the
Company's common stock and will extinguish the Company's obligation to redeem
any remaining shares of 8% Preferred Stock for $10.00 per share in cash in 2011.

10


ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data, derived
from the Company's audited financial statements, for the five-year period ended
December 31, 2002. The selected financial data of the Company for the year ended
December 31, 1998 is not comparable to the other years presented below due to
the Company's acquisition of MEG on October 1, 1998. The Company has not
declared dividends on its common stock during any of the periods presented
below.



Year Ended
December 31,
----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
(in thousands, except per share amounts)
Statements of Operations
Data:

Net sales.......................... $232,076 $ 319,645 $ 231,651 $ 181,224 $ 299,046
(Loss) income from continuing operations................. (32,610) (32,260) (89,858) (27,473) 26,774
Loss from continuing operations per common share ........ (1.23) (1.39) (3.13) (1.27) (1.07)
Extraordinary item....................................... -- (1,531) -- 32,738 --
Cumulative effect of change in accounting principle (1).. -- -- -- -- (4,164)
Net (loss) income (2) (32,610) (33,791) (89,858) 5,265 22,610
Basic and diluted net loss per common share (2).......... (1.23) (1.43) (3.13) (0.31) (1.18)
Preferred dividends...................................... 3,380 14,220 15,395 16,034 68,132
Goodwill amortization (1)................................ 6,545 24,277 23,769 23,465 --
Pro forma net (loss) income from continuing operations (1) (26,065) (7,983) (66,089) (4,008) 26,774
Pro forma loss from continuing operations
per share (1).......................................... (1.01) (0.66) (2.42) (0.58) (1.07)
Pro forma net (loss) income (1).......................... (26,065) (9,514) (66,089) 28,730 22,610
Pro forma basic and diluted net (loss) income per
common share (1)....................................... (1.01) (0.71) (2.42) 0.37 (1.18)

December 31,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Balance Sheet Data:
Working (deficit) capital ............................... (133,392) 91,919 43,067 29,990 32,604
Total assets ............................................ 689,904 654,637 553,957 517,570 517,519
Borrowings .............................................. 200,000 -- -- 37,000 --
Other non-current debt .................................. 27,000 250,000 250,000 150,962 150,962
Redeemable preferred stock .............................. 172,380 186,790 202,185 207,975 32,780
Stockholders' equity .................................... 183,624 135,763 31,396 41,958 242,869




(1) Had the Company adopted SFAS 142 on October 1, 1998 (the date the Company
acquired MEG), the basic and diluted net (loss) income per common share
would have changed to the adjusted amounts indicated above.

(2) Net loss per common share, unlike net (loss) income, is net of preferred
dividends.

11


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

The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto, and the other financial
information included elsewhere in this Report.

Set forth below is a discussion of the financial condition and results of
operations of the Company for the three fiscal years ended December 31, 2002.
Because of the significant effect of the Reorganization on the Company's results
of operations, the Company's historical results of operations and
period-to-period comparisons will not be indicative of future results.

Overview

Net Sales

The Company's net sales are generated from (i) licensing the Marvel
characters for use on merchandise, toys, promotions, feature films, television
programs, theme parks and various other areas; (ii) publishing comic books and
trade paperbacks, including related advertising revenues; and (iii) marketing
and distributing toys primarily based upon characters from Spider-Man: The Movie
and characters from the movie trilogy based upon Lord of the Rings as well as
kites through its Spectra Star product line (which is scheduled to be closed
mid-2003). Licensing, publishing and toys accounted for 27%, 21% and 52%,
respectively, of the Company's net sales for the year ended December 31, 2002.
The Company expects, however, that, in 2003, licensing will replace toys as the
Company's top revenue-producing segment. The main reason for this anticipated
shift is the fact that in 2002, the best-selling Marvel toys were those based on
Spider-Man: The Movie. In 2003, by contrast, the Marvel toys expected to sell
best (toys based on The Incredible Hulk) are toys produced by TBW under its
Marvel license, whose revenue to Marvel is classified as royalty income in the
Company's licensing segment. Sales of Spider-Man: The Movie toys are expected to
decline from 2002 to 2003, and the resulting decline in toy revenues is expected
to exceed the anticipated increase in licensing revenues related to toys based
on The Incredible Hulk. This forecast reduction in overall revenues is not
anticipated to result in a decline in overall earnings. There can be no
assurances, however, to that effect.

The Company's strategy is to increase exposure of the Marvel characters
through its media and promotional licensing activities, which it believes will
create revenue opportunities for the Company through sales of toys and other
licensed merchandise. The Company uses comic book publishing to support consumer
awareness of the Marvel characters and to develop new characters and storylines.

During 2001, the Company entered into a 5 1/2 year exclusive licensing
agreement with TBW for the sale and manufacture of toy action figures and
accessories that feature Marvel characters other than those based upon movies or
television shows featuring Spider-Man and produced by Sony Pictures. TBW is
using the Toy Biz name for marketing purposes but Marvel has neither an
ownership interest in TBW nor any financial obligations or guarantees related to
TBW. The agreement represents a strategic decision by the Company to eliminate
much of the risk and investment previously associated with toys while enabling
Marvel to participate in their success through ongoing licensing fees. Toy Biz
does product design, marketing and sales for TBW and is reimbursed for these
expenses.

Toy Biz markets and distributes toys associated with Spider-Man: The Movie
which was released in May 2002. In addition, Toy Biz began marketing and
distributing toys associated with the Lord of the Rings toy license in 2001
which coincided with the release of the first of the films in the trilogy in
December of 2001. This product line continued in 2002 and coincided with the
release of the second film in the trilogy during December of 2002. This product
line will also continue in 2003 and will coincide with the release of the third
film in the trilogy during the Holiday 2003 season.

The Company records as revenue the present value of any contractually
guaranteed licensing fees from its licensing activities at the time the
Company's characters are available to the licensee and the collection of such
licensing fees is reasonably assured. Guaranteed licensing fees booked as
revenue but not yet realized are recorded as receivables. Licensing fees,
collected in advance of the period in which revenue would be recognized, are
recorded as deferred revenue.

12


Operating Expenses: Cost of Sales

During the twelve months ended December 31, 2000 and 2001, there were
generally no material cost of sales associated with the licensing of the
Company's characters. Beginning in 2002, expenses associated with a revenue
sharing arrangement between the Company and Universal Studios relating to The
Hulk motion picture, which is scheduled to be released in June 2003, were
charged to Licensing's Cost of Sales.

Cost of sales for comic book and trade paperback publishing consists of
art, editorial, and printing costs. Art and editorial costs account for the most
significant portion of publishing cost of sales. Art and editorial costs consist
of compensation to editors, writers and artists. The Company generally hires
writers and artists on a freelance basis but has exclusive employment contracts
with certain key writers and artists.

The Company out-sources the printing of its comic books to unaffiliated
companies. The Company's cost of printing is subject to fluctuations in
commodity-based products such as paper.

Cost of sales for the toy business consists of product and package
manufacturing, shipping and agents' commissions. The most significant portion of
cost of sales is product and package manufacturing. The Company, which utilizes
multiple manufacturers, solicits multiple bids for each project in order to
control its manufacturing costs. A substantial portion of the Company's toy
manufacturing takes place in China. A substantial portion of the Company's toy
manufacturing contracts are denominated in Hong Kong dollars.

In the fourth quarter of 2000, in connection with the Company's
discontinuation of toy lines in the game and promotional dolls categories, the
Company increased its inventory reserve by an additional $3.8 million by writing
down certain inventories related to those discontinued toy lines. In connection
with the planned discontinuance of the Spectra Star product line within Toy Biz,
the Company increased its inventory reserve by an additional $2.2 million in the
fourth quarter of 2002.

Operating Expenses: Selling, General and Administrative

Selling, general and administrative costs consist primarily of payroll,
royalties related to the Toy Biz segment, legal costs associated with presently
active litigation matters, distribution fees related to the Publishing segment,
advertising, and development costs associated with the X-Men Evolution animated
television series.

Royalties are payable on toys based on characters licensed from third
parties, such as New Line Cinema, as well as toys developed by outside
inventors. Royalty payments are also paid to Sony for toys based on Spider-Man:
The Movie as part of the Company's license agreement with Sony.

Operating Expenses: Depreciation and Amortization

For the years ended December 31, 2000 and 2001, depreciation and
amortization expense consisted of amortization of goodwill and other
intangibles, tooling, product design and development, packaging design and
depreciation expense. Amortization expense related to goodwill was amortized
over an assumed 20-year life. However, effective January 1, 2002, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets", and accordingly
will no longer amortize goodwill but will be subject to annual impairment tests
in accordance with the statement (See Note 3 to the Consolidated Financial
Statements). The results of the Company's goodwill impairment tests are
described under "Results of Operations of the Company - Year ended December 31,
2002 compared with year ended December 31, 2001." The first of the Company's
impairment reviews, performed at December 31, 2002, did not result in an
impairment charge. The Company will perform its future annual reviews as of
December 31st of each subsequent year. Amortization expense relating to goodwill
for the years ended December 31, 2000, 2001 and 2002 was $23.8 million, $23.5
million and $0, respectively.

Tooling and product design and development and packaging design expense,
which are attributable to the toy business, are normally amortized over the life
of the respective product. However, in the fourth quarter of 2000, the Company
wrote down a substantial portion of its tooling, product design and development
and packaging design costs by an additional $16.8 million in excess of normal
amortization in connection with the discontinuance of certain product categories
and lines. Amortization of such costs amounted to $29.5 million, $4.5 million,
and $4.2 million during 2000, 2001 and 2002, respectively.

13


Results of Operations of the Company

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

The Company's net revenue increased approximately $117.8 million or 65% to
$299.0 million for the year ended December 31, 2002 from $181.2 million in 2001.
The improvements across all operating segments are detailed as follows:

o Toy Biz segment revenues increased by approximately $63.3 million or 69% to
$155.0 million (from $91.7 million in the 2001 period) primarily due to the
sales of action figures and accessories based on the characters from
Spider-Man: The Movie. This increase was partially offset by the cessation
of sales of Marvel character based toys, which effective July 2001, have
been sold by TBW under a license agreement. In addition, as part of the
year 2000 restructuring, revenue from close-out sales of discontinued
products in 2001 were not repeated in 2002.

o Licensing revenue increased by approximately $39.5 million or 99% to $79.6
million (from $40.0 million in the 2001 period). Factors contributing to
this increase include the Company's participation of $10.4 million relating
to the box office receipts and DVD/Video sales and rentals for Spider-Man:
The Movie as well as an advance payment of $5.0 million from Sony Pictures
to begin production on the sequel of Spider-Man: The Movie. Second, the
increase in realization of approximately $18.6 in royalty income from
approximately $3.2 million recognized in 2001 to approximately $21.8
million in 2002 related to TBW's sales of licensed toy products. The
increase was generated as a result of the popularity of Marvel character
based toy lines, and the fact that 2002 represented the first full year of
the agreement as compared to only six months during 2001.

o Publishing's revenue increased by approximately $15.0 million or 30% to
$64.5 million (from $49.5 million in the 2001 period) due to an increase in
sales of comic books and trade paperbacks to the direct and mass markets.
Revenue from the direct market (specialty comic retail stores) increased
approximately $9.6 million to $48.9 million in 2002 (from $39.3 million in
2001) and consists of sales of comic books and trade paperbacks. Revenue
from the mass market (now including Borders and Barnes & Noble bookseller
chains) increased approximately $5.9 million to $7.0 million in 2002 (from
$1.1 million in 2001) and consists of trade paperbacks only. According to
the publication Comics & Games Retailer, Marvel maintained approximately a
41% share of the North American comic market sold through specialty comic
retail stores in 2002, which compares to a 38% share in 2001.

Gross profit increased by $64.4 million to $156.9 million in 2002 as
compared to $92.5 million in 2001. As was the case with net revenue, each
operating segment contributed to the increase in gross profit over the prior
year. The Licensing, Toy Biz and Publishing segments' gross profit accounted for
$35.1 million, $21.8 million and $7.5 million of the increase, respectively. The
growth in Licensing revenues, where gross profit as a percentage of sales is
approximately 94%, increased in the Company's consolidated gross profit as a
percentage of sales to 52% in 2002 from 51% in 2001. Inventory reserves of $2.2
million were charged in 2002 to cost of sales in the Toy Biz segment due to the
planned discontinuance of the Spectra Star product line.

Selling, general and administrative expenses increased approximately $23.8
million to $85.8 million in 2002 from $62.0 million in 2001. This was primarily
due to increases across all operating segments. The Licensing segment incurred
higher costs of $4.9 million, primarily due to $1.8 million of higher payroll
costs and $2.0 million in advertising costs. A 2002 increase of $3.3 million in
expenses in the Publishing segment was primarily due to the increased
distribution fees of approximately $2.2 million that relate to increased sales
of comic book and trade paperbacks to the direct and mass markets. The Toy Biz
segment incurred $7.8 million in higher costs during 2002 primarily due to
approximately $13.7 million in increased royalties including accelerated
write-offs of prepaid royalty payments associated with the Lord of the Rings toy
license as well as higher royalties related to the sale of toys based on
Spider-Man: The Movie. This increase was partially offset by lower advertising
costs of approximately $2.8 million and increased reimbursement of $5.5 million
(to $7.2 million in 2002) from TBW for administrative and management support
provided. A 2002 increase of $4.8 million in the Corporate segment was primarily
due to increased legal fees and accrued estimated settlement values associated
with presently active litigation matters (See Note 13 to the Consolidated
Financial Statements - Commitments and Contingencies - Legal Matters for further
details) and higher payroll costs.

14


For the year ended December 31, 2002, the Company recognized $13.8 million
in income as compared to losses of $0.3 million in the comparable 2001 period in
connection with its share in a jointly owned limited partnership with Sony whose
purpose is to pursue licensing opportunities for motion picture and television
related merchandise relating to the Spider-Man: The Movie characters. The
Company accounts for the activity of this joint venture under the equity method.

Depreciation and amortization expense decreased approximately $23.5 million
to approximately $5.8 million in the 2002 period (from approximately $29.3
million in the 2001 period) primarily due to the effect of the adoption of SFAS
No 142, "Goodwill and Other Intangible Assets", whereby periodic goodwill
amortization charges are no longer recorded (See Note 3 to the Consolidated
Financial Statements).

During the first half of 2002, the Company completed the first of the
impairment tests of goodwill required under SFAS 142, which was adopted
effective January 1, 2002. Under the new rules, goodwill is no longer subject to
amortization but it is reviewed for potential impairment, upon adoption and
thereafter, annually or upon the occurrence of an impairment indicator. The
annual amortization of goodwill, which would have approximated $23.5 million, is
no longer required. Other intangible assets continue to be amortized over their
useful lives. As a result of completing the required test, the Company recorded
a charge retroactive to the adoption date for the cumulative effect of the
accounting change in the initial amount of $4.6 million, net of $2.6 million
tax, representing the excess of the carrying value of the toy merchandising and
distribution reporting unit as compared to its estimated fair value. In the
third and fourth quarters of 2002, the Company recorded quarterly adjustments of
$0.2 million and $0.2 million, respectively, to the income tax provision related
to this charge so as to properly reflect the full year effective tax rate. At
December 31, 2002, the net cumulative effect of this change in accounting
principle was $4.2 million.

Interest expense increased approximately $12.8 million for the year ended
December 31, 2002 as compared to 2001 primarily due to the accelerated write-off
of deferred financing costs associated with the early repayment of the Company's
three year term bank loan. Interest expense associated with the term bank loan,
which was outstanding for the majority of 2002 as compared to one month in 2001,
also contributed to the increase in the 2002 period. In 2001, the Company
repurchased approximately $99.0 million of its outstanding senior notes. Cash
interest savings from that repurchase (approximately $11.9 million on an annual
basis) were exceeded by the non-cash amortization of deferred financing costs
associated with the HSBC Warrants and the Perlmutter Guaranty and the Security
Agreement. Cash interest expense aggregated approximately $20.8 million and
$27.0 million during the years ended December 31, 2002 and 2001, respectively.

The Company's effective tax rate for the twelve months ended December 31,
2002 (30.8%) was lower than the federal statutory rate due primarily to the
payment of certain unsecured claims and Administration Expense Claims (purchase
accounting), which arose during the bankruptcy. At December 31, 2002, the
Company has Federal net operating loss carryforwards of approximately $132.0
million, which are scheduled to expire in the years 2017 through 2020. Of the
total Federal loss carryforwards, approximately $39.8 million is subject to a
Section 382 limitation. A portion of these pre-acquisition NOLs was utilized in
the year ended December 31, 2002 and recorded as a $7.9 million reduction in
goodwill. Additionally, the Company has various state and local net operating
loss carryforwards of approximately $365.4 million, which will expire in various
jurisdictions in years 2005 through 2021. The state and local loss carryforwards
are also generally subject to a Section 382 limitation. As of December 31, 2002,
no value has been ascribed in the accompanying financial statements for either
Federal or state and local net operating loss carryforwards.

The Company evaluates its net deferred tax asset valuation allowances on a
quarterly basis. The elimination or reduction of these valuation allowances will
occur in accordance with generally accepted accounting principles and
management's conclusion that the asset's recoverability will be more likely than
not.

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

The Company's net revenue decreased approximately $50.4 million to $181.2
million for the year ended December 31, 2001 from $231.6 million in the 2000
period. Toy Biz revenues were down $75.6 million or 45% primarily as a result of
the licensing of Marvel character based toys to TBW, an unrelated entity,
effective July 1, 2001. The decrease in Toy Biz revenues was also the result of
declining sales relating to X-Men motion picture toys, dolls, World Championship
Wrestling products and Pokemon marbles which were sold through close-out sales
in order to dispose of this inventory according to the Company's plan of
restructuring for the Toy Biz division. Licensing revenue increased by
approximately $20.9 million in 2001 from 2000 as a result of a substantial
number of licensing agreements signed across a wide array of consumer products

15


such as apparel, electronics, interactive games, stationery and back to school,
seasonal gifts and novelties, footwear, and collectibles. Additional licensing
revenues were also recognized from first and second seasons of our television
series "X-Men Evolution" as well as from our licensing agreement with TBW
effective July 1, 2001. Licensees include such names as Buster Brown, Haddad,
Encore Software, Universal, Burger King and The Dairy Board. Publishing revenues
increased by approximately $4.3 million primarily due to increased sales of
comic books and trade paperbacks to the direct market.

Gross profit decreased approximately $10.6 million to $92.5 million in 2001
from $103.1 million in 2000. The reduction in Toy Biz division gross profit
accounted for approximately $34.7 million of the decrease which was partially
offset by an increase in Licensing gross profit of $21.4 million and an increase
in Publishing gross profit of $2.7 million. Gross Profit as a percentage of net
sales increased to approximately 51% in 2001 from approximately 45% in 2000. The
licensing and publishing divisions produced gross margins of 100% and 52%,
respectively. The gross profit margin for the Toy Biz division decreased to 29%
in 2001 from approximately 37% in 2000 due primarily to a higher percentage of
close out sales of Marvel products relating to the X-Men motion picture, Dolls,
WCW products and Pokemon marbles as well as other activity toys and games, then
estimated at the end of 2000.

Selling, general and administrative expenses decreased approximately $45.5
million to $62.0 million in 2001 from $107.5 million in 2000. Expense reductions
in the toy division accounted for approximately $48.9 million of the decrease
primarily due to lower advertising, royalty, other selling expenses and payroll.
Selling, general and administrative expense as a percentage of net sales
decreased to approximately 34% in 2001 from approximately 46% in 2000 mainly due
to cost reductions relating to the elimination of certain high risk and media
intensive product categories and lines from the toy division. Further, pursuant
to its agreement with TBW, the Company provides TBW certain administrative and
management support for which TBW reimburses the Company. Included as a reduction
of selling, general and administrative expenses are $1.7 million of
reimbursements received from TBW for services provided during the period July 1,
2001 through December 31, 2001.

A pre-acquisition litigation charge of $3.0 million in regards to the
matter of MacAndrews & Forbes v. Marvel was recorded during the second quarter
of 2001. On July 25, 2001, a jury verdict was entered in the Sedgwick County,
Kansas District Court in the amount of $3.0 million on a breach of contract
action based on a 1994 toy license between Toy Biz Inc. and The Coleman Company.
The complaint alleged that Toy Biz Inc. did not fulfill its obligation to spend
certain monies on the advertising and promotion of Coleman's products. The
Company filed and intends to vigorously prosecute an appeal. The Company was
required to post a letter of credit in the amount of the judgement plus
interest.

During 2001, the Company determined that approximately $3.5 million of
liability related to Administration Expense Claims payable included in the final
purchase price allocation during 1999 was no longer required. A reduction in the
liability, Administration Expense Claims payable, was included in operating
results.

Depreciation and amortization expense decreased approximately $25.1 million
to $5.6 million in 2001 from $30.7 million in 2000 primarily due to additional
amortization expense of $16.8 million recorded in the fourth quarter of 2000 for
accelerated write-offs of tooling, product design and development and packaging
design related to discontinued toy products. In addition, lower capital
expenditures of $7.2 million in 2001 as compared to $15.1 million in 2000
contributed to the decrease in depreciation and amortization.

Amortization of goodwill and other intangibles decreased slightly in 2001
as compared to 2000.

Interest expense decreased approximately $2.7 million to $29.2 million in
2001 from $31.9 million in 2000, primarily due to the repurchase of $99.0
million in principal of Senior Notes during the third and fourth quarters of
2001.

During 2001, the Company, through a series of transactions, reacquired an
aggregate $99.0 million principal amount of its senior notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The $99.0
million principal amount includes $39.2 million with a fair market value of
approximately $20.0 million (including approximately $0.3 million of accrued
interest) received in satisfaction of advanced licensing fees from a third party
as described in Note 9 to the Consolidated Financial Statements. The principal
amount also includes $46.6 million purchased from Mr. Perlmutter for $26.8
million (including approximately $1.9 million of accrued interest). The Company

16


recorded an extraordinary gain of $32.7 million, net of write-offs of deferred
financing fees of $3.2 million and income taxes of $11.3 million

As a result of the above, the Company reported net income of $5.3 million
in 2001 compared to a net loss of $89.9 million in 2000, an increase of
approximately $95.2 million. The Company reported a loss per share after
preferred dividends of $0.31 in 2001 compared to a loss per share after
preferred dividends of $3.13 in 2000.

Liquidity and Capital Resources

The Company's primary sources of liquidity are cash on hand, cash flow from
operations and cash available from the $15.0 million HSBC letter of credit and
$15.0 million credit line facilities. The Company anticipates that its primary
needs for liquidity will be to: (i) conduct its business; (ii) meet debt service
requirements; (iii) make capital expenditures; and (iv) pay Administration
Expense Claims.

Net cash (used in) provided by the Company's operations during the years
ended December 31, 2000, 2001 and 2002 were ($24.2) million, $9.9 million and
$75.0 million, respectively.

At December 31, 2002, the Company had working capital of $32.6 million,
including cash of $53.7 million.

The 8% Preferred Stock pays quarterly dividends on a cumulative basis on
the first business day of January, April, July, and October in each year,
commencing January 4, 1999. Dividends are payable, at the option of the Board of
Directors, in cash, in additional shares of 8% Preferred Stock or in any
combination thereof. The Company is restricted under the indenture governing its
senior notes from making dividend payments on the 8% Preferred Stock except in
additional shares of 8% Preferred Stock. In an effort to reduce the redemption
requirements associated with the Company's 8% Preferred Stock, the Company
completed an Exchange Offer on November 18, 2002, when approximately 17.6
million (85%) shares of its 8% Preferred Stock were tendered in exchange for its
common stock. Under the Exchange Offer, 1.39 shares of common stock were issued
for every share of 8% Preferred Stock tendered. In the fourth quarter of 2002,
the Company recorded a non-cash charge of $55.3 million (representing the fair
value of the additional common shares issued in the Exchange Offer) as a
preferred dividend in connection with this exchange. Earnings per share in 2003
will be impacted by a full-year effect of the additional common shares and the
elimination of the preferred stock dividend associated with those shares
exchanged. Under the terms of the 8% Preferred Stock, the Company is able to
force the conversion of all outstanding shares of 8% Preferred Stock following
the completion of 10 consecutive trading days on which the closing price of the
Company's common stock exceeds $11.55 per share. March 18, 2003 marked the 10th
consecutive trading day on which the Company's common stock's closing price met
this criterion. As a result, and as the Company announced on March 19, 2003, the
Company will force the conversion of all of the outstanding 8% Preferred Stock.
The conversion will extinguish the Company's obligation to redeem any remaining
shares of 8% Preferred Stock for $10.00 per share in cash in 2011. The
conversion is expected to be effective on March 30, 2003.

The Company estimates that it may be required to pay approximately $1.3
million of additional Administration Expense Claims, although there can be no
assurance as to the amount the Company will be required to pay.

The Company will be required to make a cash payment to MEG's unsecured
creditors at such time as the amount thereof is determined. The Company
initially deposited $8 million into a trust account to satisfy the maximum
amount of such payment. Through December 31, 2002, the Company received
approximately $2.2 million from the trust account, primarily as a result of a
settlement with the NBA. The balance in the trust account as of December 31,
2002 is approximately $3.0 million.

On February 25, 1999, the Company completed a $250.0 million offering of
senior notes in a private placement exempt from registration under the
Securities Act of 1933 (the "Securities Act") pursuant to Rule 144A under the
Securities Act. On August 20, 1999, the Company completed an exchange offer
under which it exchanged virtually all of those senior notes, which contained
restrictions on transfer, for an equal principal amount of registered,
transferable senior notes (the "Senior Notes"). The Senior Notes are due June
15, 2009 and bear interest at 12% per annum payable semi-annually on June 15th
and December 15th. The Senior Notes may be redeemed beginning June 15, 2004 for
a redemption price of 106% of the principal amount, plus accrued interest. The
redemption price decreases 2% each year after 2004 and will be 100% of the
principal amount, plus accrued interest, beginning June 15, 2007. Principal and

17


interest on the Senior Notes are guaranteed on a senior basis jointly and
severally by each of the Company's domestic subsidiaries.

During 2001, the Company, through a series of transactions, reacquired an
aggregate $99.0 million principal amount of its senior notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The $99.0
million principal amount includes $39.2 million with a fair market value of
approximately $20.0 million (including approximately $0.3 million of accrued
interest) received in satisfaction of advanced licensing fees from a third party
as described in Note 9 to the Consolidated Financial Statements. The principal
amount also includes $46.6 million purchased from Mr. Perlmutter for $26.8
million (including approximately $1.9 million of accrued interest). The Company
recorded an extraordinary gain of $32.7 million, net of write-offs of deferred
financing fees of $3.2 million and income taxes of $11.3 million.

On October 5, 2001, the Company terminated its credit facility with
Citibank and replaced $12.4 million of letters of credit outstanding under the
facility with letters of credit guaranteed by Object Trading Corp., a
corporation wholly owned by Isaac Perlmutter. Mr. Perlmutter is Vice Chairman of
the Company's Board of Directors, an employee of the Company and the Company's
largest stockholder.

On November 30, 2001, the Company and HSBC Bank USA entered into an
agreement for a senior credit facility (the "HSBC Credit Facility") comprised of
a $20 million revolving letter of credit facility renewable annually for up to
three years and a $37.0 million multiple draw three year amortizing term loan
facility, which was used to finance the repurchase of a portion of the Company's
Senior Notes. The term loan bore interest at the lender's reserve adjusted LIBOR
rate plus a margin of 3.5%. On August 30, 2002, the Company prepaid $10.0
million of the term loan. In connection with this early repayment of the term
loan, the Company recorded a charge of $4.1 million for the write-off of a
proportionate share of unamortized deferred financing costs associated with the
facility. On December 12, 2002, the Company prepaid the remaining $22.4 million
of the term loan and recorded an additional charge of $7.7 million for the
write-off the remaining unamortized deferred financing costs associated with
this facility. Approximately $15.8 million of letters of credit previously
issued by Object Trading Corp. were replaced, in connection with the
establishment of the HSBC Credit Facility, by letters of credit issued by HSBC
Bank USA. On December 18, 2002, the Company amended the HSBC Credit Facility to
provide for a $15.0 million revolving credit facility and a $15.0 million letter
of credit facility. As of December 31, 2002, $8.9 million of letters of credit
were outstanding and there were no borrowings under the HSBC revolver. The HSBC
Credit Facility contains customary event of default provisions and covenants
restricting the Company's operations and activities, including the amount of
capital expenditures, and also contains certain covenants relating to the
maintenance of minimum tangible net worth and minimum free cash flow. The HSBC
Credit Facility is secured by (a) a first priority perfected lien in all of the
assets of the Company; and (b) a first priority perfected lien in all of the
capital stock of each of the Company's domestic subsidiaries. Borrowings would
bear interest at prime or LIBOR-plus-2 per annum.

In consideration for the HSBC Credit Facility, the Company issued warrants
to HSBC to purchase up to 750,000 shares of the Company's common stock. These
warrants had an exercise price of $3.62 and a life of five years. The fair value
for the warrants was estimated at the date of issuance using the Black-Scholes
pricing model with the following assumptions: risk free interest rate of 4.16%;
no dividend yield; expected volatility of 0.924; and expected life of five
years. The aggregate value of approximately $2.0 million was initially included
in deferred financing costs. Due to the prepayment of the term loan, the related
unamortized deferred financing costs which were being amortized over the initial
three year term of the HSBC Credit Facility using the effective interest method
were subsequently written off on an accelerated basis as of December 31, 2002.
In December 2002, HSBC exercised 500,000 warrants and received 295,110 shares of
common stock under a Cashless Exercise Ratio provision of the warrants. As of
December 31, 2002, warrants to purchase 250,000 common shares remained
outstanding with HSBC and were exercised in February 2003.

In connection with the HSBC Credit Facility, the Company and Isaac
Perlmutter entered into a Guaranty and Security Agreement ("Security
Agreement"). Under the terms of the Guaranty, Mr. Perlmutter has guaranteed the
payment of the Company's obligations under the HSBC Credit Facility in an amount
equal to 25% of all principal obligations relating to the HSBC Credit Facility
plus an amount, not to exceed $10.0 million, equal to the difference between the
amount required to be in the cash reserve account maintained by the Company and
the actual amount on deposit in such cash reserve account at the end of each
fiscal quarter; provided that the aggregate amount guaranteed by Mr. Perlmutter
will not exceed $30.0 million. Under the terms of the Security Agreement, Mr.
Perlmutter has provided the creditors under the HSBC Credit Facility with a
security interest

18


in the following types of property, whether currently owned or subsequently
acquired by him: all promissory notes, certificates of deposit, deposit
accounts, checks and other instruments and all insurance or similar payments or
any indemnity payable by reason of loss or damage to or otherwise with respect
to any such property. This guaranty continues with the current HSBC revolving,
and letter of, credit facilities.

In consideration for the Security Agreement, the Company issued Mr.
Perlmutter immediately exercisable warrants on November 30, 2001 to purchase
3,867,708 shares of the Company's common stock. These warrants have an exercise
price of $3.11 and a life of five years. The aggregate value of the exercisable
warrants was approximately $10.5 million and is included in the Consolidated
Balance Sheet at December 31, 2001 as deferred financing costs. During February
2002, Mr. Perlmutter guaranteed approximately $4.4 million relating to the
Company's corporate office lease agreement as well as certain letters of credit
totaling approximately $0.2 million, which are included within his maximum
guarantee of $30.0 million, for which the Company granted him warrants to
purchase 735,601 shares of common stock at an exercise price of $3.11 and a life
of five years. Based on the cumulative amounts guaranteed by Mr. Perlmutter,
4,603,309 warrants were exercisable as of December 31, 2002. The fair value of
the warrants was estimated at the date of issuance using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate of
4.16%; no dividend yield; expected volatility of 0.92; and expected life of five
years. The aggregate value of the exercisable warrants of approximately $13.0
million was included in the Consolidated Balance Sheet starting November 21,
2001 as deferred financing costs. Due to the prepayment of the Company's term
loan, all related deferred financing costs, have initially been amortized over
the initial three year term of the HSBC Credit Facility using the effective
interest method and subsequently written off on an accelerated basis as of
December 31, 2002.

Capital expenditures by the Company during the years ended December 31,
2000, 2001 and 2002 were approximately $15.1 million, $7.2 million and $3.0
million, respectively.




The following table sets forth the Company's Contractual Cash Obligations
as of December 31, 2002:

Contractual
Cash Obligations Payments Due By Period
- ------------------ --------------------------------------------------------
Less than After
(Amounts in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- --------------------- ------------ -------- --------- --------- --------

Long Term Debt $150,962 $ -- $ -- $ -- $150,962
Operating Leases 13,739 3,383 6,810 2,556 990
-------- -------- -------- -------- --------
Total Contractual
Cash Obligations $164,701 $ 3,383 $ 6,810 $ 2,556 $151,952
======== ======== ======== ======== ========


The Company is a party to a lease agreement for a public warehouse in Fife,
Washington. The lease payments associated with this warehouse, which are
estimated to average between $72,000 and $120,000 per year, are based on cubic
feet, measured monthly, and are subject to change depending on the capacity
devoted to the inventory stored at this location.

The Company has a contractual obligation under a studio agreement to spend
approximately $1.5 million and $1.0 million in advertising for the 2002/2003 and
2003/2004 broadcast years, respectively.




The following table sets forth the Company's Other Commercial Commitments as of
December 31, 2002:

- ------------------------ ------------------------------------------------
Other Commercial Amount of Commitment
Commitments Total Expiration Per Period
- ------------------------ ------ ----------------------------------------
Less than Over
(Amounts in thousands) 1 Year 1-3 Years 4-5 Years 5 Years
- ------------------------ -------- --------- --------- --------

Standby Letters of Credit $8,894 $ 250 $8,644 $ -- $ --
------ -------- --------- --------- --------


19


The Company is obligated to make payments under various royalty agreements
of approximately $5,296,000 and $35,000 during the years ending December 31,
2003 and 2004, respectively.

The Company remains liable in connection with businesses previously sold
and has been indemnified against such liabilities by the purchaser of such
businesses.

The Company believes that cash on hand, cash flow from operations,
borrowings available under the HSBC credit facilities and other sources of
liquidity, will be sufficient for the Company to conduct its business, meet debt
service requirements, make capital expenditures and pay Administration Expense
Claims.

Seasonality

The Company's annual operating performance depends, in large part, on its
sales of toys during the Christmas selling season. During 2000, 2001 and 2002,
62%, 45%, and 55% respectively, of the Company's net toy sales were realized
during the second half of the year. This seasonality would normally require
significant use of working capital to build inventory during the year and
require accurate forecasting of demand for the Company's products during the
Christmas selling season. However, in order to reduce the financial risk and
uncertainty associated with its toy business, the Company (i) licensed the sale
and manufacture of Marvel toy action figures and accessories to TBW with the
exception of characters based upon movies or television shows featuring
Spider-Man and produced by Sony Pictures, -(ii) shifted the emphasis of its
business to direct import and (iii) eliminated certain high risk product
categories and lines.

Critical Accounting Policies and Estimates

General

Management's discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. We review the accounting policies we use in reporting our
financial results on a regular basis. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, future revenues from our animated television series,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to, accounts receivable, inventories, goodwill and intangible assets,
prepaid royalties, molds, tools and equipment costs, product, package design
costs, future revenue from episodic television series, Administration Expense
Claims liabilities, income taxes, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. These estimates and judgments are reviewed by management on an
ongoing basis, and by the Audit Committee at the end of each quarter prior to
the public release of our financial results. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.

Revenue Recognition

Merchandise Sales, Sales Returns and Customer Allowances

Merchandise sales, including toys and all non-subscription related comic
book sales are recorded when title and risk of ownership have passed to the
buyer. Appropriate provisions for future returns and other sales allowances are
established based upon historical experience, adjusting for current economic and
other factors affecting the customer. The Company regularly reviews and revises
when considered necessary its estimates of sales returns based primarily upon
actual returns, planned product discontinuances, and estimate sell-through at
the retail level. No provision for sales returns is provided when the terms of
the underlying sales do not permit the customer to return product to the
Company. Historical return rates for returnable comic book sales are typically
higher than those related to toy sales. However, sales to the Company's largest
comic book distributor are made principally on a no return basis.

20


Subscription Revenues

Subscription revenues related to our comic book business are generally
collected in advance for a one year subscription and are recognized as income on
a pro rata basis over the subscription period as the comic books are delivered.

License Revenues

Revenue from distribution fees, and licensing of characters owned by the
Company, are recorded in accordance with guidance provided in Securities and
Exchange Commission Staff Accounting Bulletin No. 101 "Revenue Recognition."
Under the guidelines, revenue is recognized when the earnings process is
complete. This is considered to have occurred when persuasive evidence of an
agreement between the customer and the Company exists, when the characters are
made available to the licensee, the fee is fixed or determinable and collection
is reasonably assured. Receivables from licensees due more than one year beyond
the balance sheet date are discounted to their present value. Revenues related
to the licensing of animated television series are recorded in accordance with
AICPA Statement of Position 00-2 "Accounting by Producers or Distributors of
Films." Under this Statement of Position revenue is recognized when persuasive
evidence of a sale or licensing arrangement with a customer exists, when an
episode is delivered in accordance with the terms of the arrangement; the
license period of the arrangement has begun and the customer can begin its
exhibition, the arrangement fee is fixed or determinable, and collection of the
arrangement fee is reasonably assured.

Under the Company's revenue recognition policy for licenses involving
minimum payment obligations to the Company, revenue is often recognized prior to
the collection of all amounts ultimately due.

Revenue recognized under license agreements during the years December 31,
2000, 2001 and 2002 were generated within the following business categories:




Years Ended December 31,
(in thousand's)
2000 2001 2002
------- ------- -------

Apparel and Accessories $5,099 $ 7,718 $11,346
Entertainment (Including studios, themed
Attractions and electronic games) $10,049 $14,756 $39,529
Toys $ 675 $ 6,363 $24,477
Other $ 3,336 $11,175 $ 4,210
-------- -------- -------
Totals $19,159 $40,012 $79,562
======== ======== =======


Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
In evaluating the collectibility of accounts receivable, we consider a number of
factors, including the age of the accounts, changes in status of the customers'
financial condition and other relevant factors. Estimates of uncollectable
amounts are revised each period, and changes are recorded in the period they
become known. A significant change in the level of uncollectable amounts would
have a significant effect on the Company's results of operations.

Excess and Obsolete Inventory

The Company writes down excess and obsolete inventory equal the estimated
market value based upon assumptions about future product demand, consumer
trends, the success of related feature films, the availability of alternate
distribution channels and overall market conditions. If actual product demands,
consumer trends and market conditions are less favorable than those projected by
management, additional inventory write-downs could be required. In connection
with the planned discontinuance of the Spectra Star product line around mid
2003, the Company recorded an additional $2.2 million in inventory reserves
during the fourth quarter of 2002 and are reflected in the cost of sales of the
Toys segment.

21


Molds and Tools

Molds and tools are stated at cost less accumulated depreciation. The
Company owns the molds and tools used in the production of the Company's
products by third-party manufacturers. For financial reporting purposes,
depreciation and amortization is computed by the straight-line method over the
estimated selling life of the related toys, which is generally one to
three-years. On an ongoing basis, the Company reviews the recoverability of the
carrying value of the molds and tools. The Company considers factors including
actual sales, sell through at the retail level, the overall retail environment
and when applicable, the overall commercial success of the related and
comparable feature length movies, television shows and comic books. If the facts
and circumstances suggest a change in useful lives of the molds and tools or
impairment in the carrying value, the useful lives are adjusted and the
unamortized costs are expensed.

Product and Package Design Costs

Product and package design costs are stated at cost less accumulated
depreciation and amortization. The Company capitalizes costs related to product
and package design when such products are determined to be commercially
acceptable. Product design costs include costs relating to the preparation of
precise detailed mechanical drawings and the production of sculptures and other
handcrafted models from which molds and dies are made. Package design costs
include costs relating to artwork, modeling and printing separations used in the
production of packaging. For financial reporting purposes, depreciation and
amortization is computed by the straight-line method over the estimated selling
life of the related toys, which is generally one to three-years. On an ongoing
basis, the Company reviews the recoverability of the carrying value of product
and package design costs. The Company considers factors including actual sales,
sell through at the retail level, the overall retail environment and when
applicable, the overall commercial success of the related and comparable feature
length movies, television shows and comic books. If the facts and circumstances
suggest a change in useful lives of the product and package design costs or
impairment in the carrying value, the useful lives are adjusted and the
unamortized costs are expensed.

Goodwill and Other Intangibles

The Company has significant goodwill and other intangible assets on its
balance sheet, which resulted from the acquisition of Marvel Entertainment
Group, Inc. in 1998. The valuation and classification of these assets and the
assignment of useful amortization lives involves significant judgments and the
use of estimates. We assess the fair value and recoverability of our long-lived
assets, including goodwill, whenever events and circumstances indicate the
carrying value of an asset may not be recoverable from estimated future cash
flows expected to result from its use and eventual disposition. In doing so, we
make assumptions and estimates regarding future cash flows and other factors to
make our determination. The fair value of our long-lived assets and goodwill is
dependent upon the forecasted performance of our business, changes in the media
and entertainment industry and the overall economic environment. When we
determine that the carrying value of our intangibles and goodwill may not be
recoverable, we measure any impairment based upon a forecasted discounted cash
flow method.

Effective January 1, 2002, the Company adopted Statement of Financial
Standards No. 142, "Goodwill and Other Intangible Assets," and was required to
analyze its goodwill for impairment issues during the first six months of 2002,
and then on a periodic basis thereafter. Goodwill will no longer be amortized
but will be subject to an annual (or under certain circumstances more frequent)
impairment test based on its estimated fair value. Other intangible assets that
meet certain criteria will continue to be amortized over their useful lives and
will also be subject to an impairment test based on estimated fair value.
Estimated fair value is typically less than values based on undiscounted
operating earnings because fair value estimates include a discount factor in
valuing future cash flows. There are many assumptions and estimates underlying
the determination of an impairment loss. Another estimate using different, but
still reasonable, assumptions could produce a significantly different result.
Therefore, impairment losses could be recorded in the future. The first of such
impairment test was performed during the first six months of 2002 which resulted
in the recording of a one-time non-cash charge with respect to its toy
merchandising and distribution reporting unit (See Note 3 to the Consolidated
Financial Statements for further details.) The Company performed the first of
its annual impairment reviews at December 31 2002 which did not result in an
impairment charge and will perform its future annual reviews as of December 31st
of each subsequent year.

22


Royalties

The Company regularly reviews the recoverability of its prepaid royalties
and minimum guaranteed commitments. The Company considers factors including
actual sales, sell through at the retail level, the overall retail environment
and the overall commercial success of the related and comparable feature length
movies. During 2002, the Company reviewed the recoverability of prepaid royalty
payments associated with the Lord of the Rings toy license. Due to lower than
anticipated actual sales and sell through at the retail level, the Company
accelerated the write-off of $7.9 million in prepaid royalties. These charges
are reflected in the selling, general and administrative expenses for the Toys
segment.

Accounting for Joint Venture

The Company has entered into a jointly owned limited partnership with Sony
Pictures Consumer Products Inc. to pursue licensing opportunities relating to
characters based upon movies or television shows featuring Spider-Man and
produced by Sony Pictures. The Company accounts for the activity of this joint
venture under the equity method. The joint venture began recognizing revenues
once Spider-Man: The Movie was released during May 2002.

Commitments and Contingencies

The Company is a party to certain legal actions as described in Item 3 -
Legal Proceedings and is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no such
assurances, the Company believes that its legal proceedings and claims including
those described in Item 3 - Legal Proceedings, individually and in the
aggregate, are not likely to have a material adverse effect on its financial
condition, results of operations or cash flows.

The Company regularly evaluates its litigation claims and its
Administration Expense Claims payable to provide assurance that all losses and
disclosures are provided for in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies". The Company's
evaluation of legal matters and Administration Expense Claims payable involves
considerable judgment of management. The Company engages internal and outside
legal counsel to assist in the evaluation of these matters. Accruals for
estimated losses, if any, are determined in accordance with the guidance
provided by SFAS No. 5.

Recent Accounting Pronouncements

SFAS No. 141 and No. 142, "Business Combinations and Goodwill and Other
Intangible Assets" - In January 2002, the Company adopted Statement of Financial
Accounting Standards No.142, "Goodwill and Other Intangible Assets", ("SFAS
142"), which requires companies to stop amortizing goodwill and certain
intangible assets with an indefinite useful life. SFAS 142 requires that
goodwill and intangible assets deemed to have an indefinite useful life be
reviewed for impairment upon adoption of SFAS 142 (January 1, 2002) and annually
thereafter.

Upon adoption of SFAS 142 in the first quarter of 2002, the Company
initially recorded a one-time, non-cash charge of approximately $4.6 million,
(net of income tax of approximately $2.6 million) or $0.12 per share to reduce
the carrying value of its goodwill, with respect to its toy merchandising and
distribution reporting unit. In the third and fourth quarters of 2002, the
Company recorded adjustments of $0.2 million and $0.2 million, respectively to
the initial income tax provision related to this charge so as to properly
reflect the full year effective tax rate. Such charge is non-operational in
nature and $4.2 million ($0.11 per share) is reflected as the cumulative effect
of change in accounting principle in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2002. The Company performed its
annual impairment review as of December 31, 2002 and no impairment charge was
reflected.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", effective for fiscal years
beginning after December 15, 2001. This standard supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and provides a single accounting model for long-lived assets to
be disposed of. The new standard also supersedes the provisions of APB Opinion
No. 30 with regard to reporting the effects of a disposal of a segment of a
business and required expected future operating losses from discontinued
operations to be displayed in discontinued operations in the periods in which
the losses are incurred. SFAS No. 144 was effective for the Company beginning

23


with the first quarter of 2002 and its adoption did not have a material impact
on the Company's results of operations or financial position. In April 2002, the
FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of
SFAS No. 13, and Technical Corrections as of April 2000. SFAS No. 145 revises
the criteria for classifying the extinguishment of debt as extraordinary and the
accounting treatment of certain lease modifications. SFAS No. 145 is effective
in fiscal 2003 and is not expected to have a material impact on the Company's
consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 provides guidance on
the timing of the recognition of costs associated with exit or disposal
activities. The new guidance requires costs associated with exit or disposal
activities to be recognized when incurred. Previous guidance required
recognition of costs at the date of commitment to an exit or disposal plan. The
provisions of the statement are to be adopted prospectively for exit activities
after December 31, 2002. Although SFAS No. 146 may impact the accounting for
costs related to exit or disposal activities the Company may enter into in the
future, particularly the timing of recognition of these costs, the adoption of
the statement will not have an impact on the Company's present financial
condition or results of operations.

SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" - On December 31, 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" which provides alternative
methods of transition to Statement 123's fair value method of accounting for
stock-based compensation. SFAS No. 148 also amended the disclosure provisions of
Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based compensation on
reported net income and earnings per share in annual and interim statements.

The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on date of grant, no compensation expense is recognized. The Company has elected
to follow the disclosure-only provisions under SFAS No. 148, For the purposes of
SFAS 148 pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.

The Company's pro forma information follows:



Years Ended December 31,
--------------------------------------
2000 2001 2002
-------- ------ --------
(in thousands, except per share data)


Net (loss) income, as reported ........................................................ $ (89,858) $ 5,265 $ 22,610
Net loss attributable to common stock ................................................. (105,253) (10,769) (45,522)
Net loss per share attributable to common stock - diluted ............................. (3.13) (0.31) (1.18)
Stock based employee compensation cost, net of tax, if FAS 123 was applied ............ 3,764 5,226 3,935
Pro forma net (loss) income ........................................................... (93,622) 39 18,675
Pro forma net loss attributable to common stock ....................................... (109,017) (15,995) (49,457)
Pro forma net loss per share attributable to common stock - diluted ................... $ (3.24) $ (0.47) $ (1.28)



ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has operations in Hong Kong. In the normal course of business,
the operations are exposed to fluctuations in currency values. Management
believes that the impact of currency fluctuations do not represent a significant
risk in the context of the Company's current international operations. The
Company does not generally enter into derivative financial instruments in the
normal course of business, nor are such instruments used for speculative
purposes.

Market risks related to the Company's operations result primarily from
changes in interest rates. At December 31, 2002, the Company's Senior Notes bore
interest at a fixed rate, and all of the Company's outstanding preferred stock
earns dividends at a fixed rate. A 10% increase or decrease in the interest rate
on the Company's credit facility might have a significant future impact on the
Company's financial position or results of operations. However, the fair market
value of the fixed rate debt and the outstanding preferred stock is sensitive to
changes in interest rates. The Company is subject to the risk

24


that market interest rates will decline and the interest rates for the fixed
rate debt and the fixed dividend yield on the outstanding preferred stock will
exceed the then prevailing market rates. Under its current policies, the Company
does not utilize any interest rate derivative instruments to manage its exposure
to interest rate changes.

Additional information relating to the Company's outstanding financial
instruments is included in Item 7 - Management Discussion and Analysis of
Financial Condition and Results of Operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item, the report of the
independent auditors thereon and the related required financial statement
schedule appear on pages F-2 to F-29. See the accompanying Index to Financial
Statements and Financial Statement Schedule on page F-1. The supplementary
financial data required by Item 302 of Regulation S-K appears in Note 16 to the
December 31, 2002 Consolidated Financial Statements.

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

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 is incorporated herein by reference to
the information appearing under the captions "Election of Directors," "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive proxy statement to be filed not later than April 30, 2003,
with the Securities and Exchange Commission.

Item 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference to
the information appearing under the caption "Executive Compensation" in the
Company's definitive proxy statement to be filed not later than April 30, 2003,
with the Securities and Exchange Commission.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated herein by reference to
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement to
be filed not later than April 30, 2003, with the Securities and Exchange
Commission.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated herein by reference to
the information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement to be filed not later
than April 30, 2003, with the Securities and Exchange Commission.

25


ITEM 14. CONTROLS AND PROCEDURES

Based upon their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect such
internal controls subsequent to the date of their evaluation.

PART IV

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

(a) Documents Filed with this Report

1. Financial Statements

See the accompanying Index to Financial Statements and Financial
Statement Schedule on page F-1.

2. Financial Statement Schedule

See the accompanying Index to Financial Statements and Financial
Statement Schedule on page F-1.

3. Exhibits

See the accompanying Exhibit Index immediately below.

(b) Reports on Form 8-K.

During the last quarter of 2002, the Company filed the following
Current Reports on Form 8-K:

1. Current Report on Form 8-K dated October 4, 2002, reporting Items 5
and 7.

2. Current Report on Form 8-K dated November 22, 2002, reporting Items
5 and 7.

(c) Exhibits. See the Exhibit Index immediately below.

26


EXHIBIT INDEX

Exhibit No.

2.1 Fourth Amended Joint Plan of Reorganization for Marvel Entertainment
Group, Inc. dated July 31, 1998 and filed with the United States
District Court for the District of Delaware on July 31, 1998, with
attached exhibits. (Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K dated October 13, 1998 and filed
with the Securities and Exchange Commission on October 14, 1998.)

2.2 Asset Purchase Agreement by and among Fleer Corp., Frank H. Fleer
Corp. and SkyBox International Inc. and Golden Cycle, LLC, dated as of
January 29, 1999. (Incorporated by reference to Exhibit 2.2 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.)

3.1 Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K dated October
13, 1998 and filed with the Securities and Exchange Commission on
October 14, 1998.)

3.2 Certificate of Amendment of the Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.)

3.3 Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.3
of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.)

4.1 Article V of the Restated Certificate of Incorporation (see Exhibit
3.1, above), defining the rights of holders of Common Stock.

4.2 Article VI of the Restated Certificate of Incorporation (see Exhibit
3.1, above), defining the rights of holders of 8% Preferred Stock.

4.3 Rights Agreement, dated as of August 22, 2000, between the Company and
American Stock Transfer & Trust Company as Rights Agent, defining the
rights of holders of Preferred Share Purchase Rights. (Incorporated by
reference to Exhibit 4.2 of the Company's Current Report on Form 8-K
dated August 22, 2000 and filed with the Securities and Exchange
Commission on September 12, 2000.)

4.4 Amendment to Rights Agreement, dated as of November 30, 2001, by and
between the Company and American Stock Transfer & Trust Company as
Rights Agent. (Incorporated by reference to Exhibit 10.9 of the
Company's Current Report on Form 8-K dated and filed with the
Securities and Exchange Commission on December 4, 2001.)

4.5 Amendment No. 2 to Rights Agreement, dated as of October 7, 2002, by
and between the Company and American Stock Transfer & Trust Company as
Rights Agent. (Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated October 4, 2002 and filed
with the Securities and Exchange Commission on October 7, 2002.)

4.6 Indenture, dated as of February 25, 1999, defining the rights of
holders of 12% senior notes due 2009. (Incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.)

4.7 Warrant Agreement, dated as of November 30, 2001, by and between the
Company and HSBC Securities (USA), Inc. (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated and
filed with the Securities and Exchange Commission on December 4,
2001.)

27


4.8 Warrant Agreement, dated as of November 30, 2001, by and between the
Company and Isaac Perlmutter (Incorporated by reference to Exhibit 4.2
to the Company's Current Report on Form 8-K dated and filed with the
Securities and Exchange Commission on December 4, 2001.)

10.1 Credit Agreement. dated as of November 30, 2001, by and between the
Company and HSBC Bank USA. (Incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated and filed with the
Securities and Exchange Commission on December 4, 2001.)

10.2 Pledge and Security Agreement, dated as of November 30, 2001, from the
Company and other grantors referred to therein, as Grantors, to HSBC
Bank USA, as administrative agent. (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated and
filed with the Securities and Exchange Commission on December 4,
2001.)

10.3 Subsidiary Guaranty, dated as of November 30, 2001, in favor of HSBC
Bank USA, as administrative agent. (Incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K dated and
filed with the Securities and Exchange Commission on December 4,
2001.)

10.4 Personal Guaranty by Isaac Perlmutter in favor of HSBC Bank USA, dated
as of November 30, 2001. (Incorporated by reference to Exhibit 10.4 to
the Company's Current Report on Form 8-K dated and filed with the
Securities and Exchange Commission on December 4, 2001.)

10.5 Stockholders Agreement, dated as of October 1, 1998, by and among the
Company, Avi Arad, the Dickstien Entities (as defined therein), the
Perlmutter Entities (as defined therein), The Chase Manhattan Bank,
Morgan Stanley & Co. Incorporated, and Whippoorwill Associates,
Incorporated, as agent of and/or general partner for certain accounts.
(Incorporated by reference to Exhibit 99.4 to the Company's Current
Report on Form 8-K/A dated and filed with the Securities and Exchange
Commission on October 16, 1998.)

10.6 Agreement, dated as of October 4, 2002, to Terminate Stockholders'
Agreement, dated as of October 1, 1998, among the Company and various
of its stockholders. (Incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K dated October 4, 2002 and filed
with the Securities and Exchange Commission on October 7, 2002.)

10.7 Registration Rights Agreement, dated as of October 1, 1998, by and
among the Company, Dickstein & Co., L.P., Dickstein Focus Fund L.P.,
Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and
Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor,
Mark Dickstein and Elyssa Dickstein, as Trustees of the Mark and
Elyssa Dickstein Foundation, Elyssa Dickstein, Object Trading Corp.,
Whippoorwill/Marvel Obligations Trust - 1997, and Whippoorwill
Associates, Incorporated. (Incorporated by reference to Exhibit 99.5
to the Company's Current Report on Form 8-K/A dated and filed with the
Securities and Exchange Commission on October 16, 1998.)

10.8 Registration Rights Agreement, dated as of December 8, 1998, by and
among the Company, Marvel Entertainment Group, Inc., Avi Arad, Isaac
Perlmutter, Isaac Perlmutter T.A., The Laura & Isaac Perlmutter
Foundation Inc., and Zib Inc. (Incorporated by reference to Exhibit
10.4 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.)

10.9 Registration Rights Agreement, dated February 25, 1999, by and among
the Company, certain subsidiaries of the Company, Morgan Stanley & Co.
Incorporated and Warburg Dillon Read LLC. (Incorporated by reference
to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.)

10.10 Warrant Shares Registration Right Agreement, dated as of November 30,
2001, by and between the Company and Isaac Perlmutter. (Incorporated
by reference to Exhibit 10.5 to the Company's Current Report on Form
8-K dated and filed with the Securities and Exchange Commission on
December 4, 2001.)

10.11 Sublease,dated as of June 9, 2000 between HSBC Bank USA and the
Company, as amended by First Amendment to Sublease dated December 1,
2000. (Incorporated by reference to Exhibit 10.10 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.)

28


10.12 Master License Agreement, dated as of April 30, 1993, between Avi Arad
& Associates and the Company. (Incorporated by reference to Exhibit
10.21 to the Company's Registration Statement on Form S-1, File No
33-87268.)

10.13 Separation Agreement made on July 16, 1999 by and between Eric
Ellenbogen and the Company. (Incorporated by reference to Exhibit 10.3
of the Company's Quartely Report on Form 10-Q for the quarter ended
June 30, 1999.)*

10.14 Employment Agreement between the Company and F. Peter Cuneo, dated as
of July 19, 1999. (Incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999.)*

10.15 Amendment to Employment Agreement, dated as of December 2, 2002, by
and between the Company and F. Peter Cuneo.*

10.16 Employment Agreement, dated as of September 30, 1998, by and between
Avi Arad and the Company. (Incorporated by reference to Exhibit 10.14
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.)*

10.17 Amendment to Employment Agreement with Avi Arad dated January 2001.
(Incorporated by reference to Exhibit 10.14 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.)

10.18 Employment Agreement by and between the Company and Alan Fine, dated
as of August 13, 2001.*

10.19 Employment Agreement, dated as of October 29, 1999, between the
Company and Richard Ungar. (Incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.)*

10.20 Amendment to Employment Agreement, dated as of April 9, 2002, between
the Company and Richard Ungar. (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.)*

10.21 Loan Out Agreement, dated as of October 29, 1999, between the Company
and Brentwood Television Funnies, Inc. (Incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.)*

10.22 Employment Agreement, dated as of October 29, 1999, between the
Company and Allen S. Lipson. (Incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.)*

10.23 Amendment No. 1 to Employment Agreement, dated as of November 21,
2002, by and between the Company and Allen S. Lipson.*

10.24 Amended and Restated Employment Agreement, dated as of November 21,
2002, by and between the Company and Allen S. Lipson.*

10.25 Employment Agreement, dated as of January 26, 2000, between the
Company and Bill Jemas. (Incorporated by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999.)*

10.26 Employment Agreement, dated as of November 30, 2001, by and between
the Company and Isaac Perlmutter. (Incorporated by reference to
Exhibit 10.6 to the Company's Current Report on Form 8-K dated and
filed with the Securities and Exchange Commission on December 4,
2001.)*

10.27 Employment Agreement, dated as of May 28, 2002, by and between the
Company and Kenneth P. West.*

29


10.28 Employment Agreement, dated as of November 30, 1998, between the
Company and Stan Lee. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)

10.29 1998 Stock Incentive Plan. (Incorporated by reference to Annex A of
the Company's Information Statement on Schedule 14C, filed with the
Securities and Exchange Commission on December 30, 1998.)*

10.30 Amendment No. 1 to the 1998 Stock Incentive Plan. (Incorporated by
reference to Appendix D of the Company's Proxy Statement on Schedule
14A, filed with the Securities and Exchange Commission on January 3,
2003.)*

10.31 Nonqualified Stock Option Agreement, dated as of November 30, 2001, by
and between the Company and Isaac Perlmutter. (Incorporated by
reference to Exhibit 10.7 to the Company's Current Report on Form 8-K
dated and filed with the Securities and Exchange Commission on
December 4, 2001.)

10.32 Amended and Restated Proxy and Stock Option Agreement, dated as of
November 19, 1997, among the Company, Isaac Perlmutter, Isaac
Perlmutter T.A. and Zib Inc. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated November 24,
1997).

10.33 Amended and Restated Proxy and Stock Option Agreement, dated as of
November 19, 1997, between the Company and Avi Arad. (Incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
dated November 24, 1997.)

10.34 Voting Agreement, dated as of November 30, 2001, by and among the
Registrant, Avi Arad, Isaac Perlmutter, Morgan Stanley & Co.
Incorporated, and Whippoorwill Associates, Incorporated, as agent
and/or general partner for its discretionary accounts. (Incorporated
by reference to Exhibit 10.8 to the Company's Current Report on Form
8-K dated and filed with the Securities Exchange Commission on
December 4, 2001.)

10.35 Notes Purchase Agreement, dated as of November 30, 2001, by and
between the Registrant and Isaac Perlmutter. (Incorporated by
reference to Exhibit 10.10 to the Company's Current Report on Form 8-K
dated and filed with the Securities Exchange Commission on December 4,
2001.)

10.36 Waiver Agreement, dated as of May 14, 2001, among the Company, the
guarantors party thereto, the lenders party thereto and Citibank,
N.A., as Agent, Collateral Agent and Issuer. (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.)

10.37 Copyright Security Agreement, dated as of May 14, 2001, made by the
Company and the guarantors party thereto, in favor of Citibank, N.A.,
as Collateral Agent. (Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.)

10.38 Security Agreement dated as of May 14, 2001, made by the Company and
the guarantors party thereto, in favor of Citibank, N.A., as
Collateral Agent. (Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.)

10.39 Agreement (concerning letters of credit) dated August 23, 2001,
between Object Trading Corp., the Company and Marvel Characters, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001.)

21 Subsidiaries of the Registrant.

23.1 Consent of Independent Auditors.

23.2 Consent of Independent Auditors.

30


23.3 Consent of Independent Auditors.

24 Power of attorney (included on signature page hereto).

99.1 Certification by Chief Executive Officer pursuant to Sarbanes-Oxley
Act.

99.2 Certification by Chief Financial Officer pursuant to Sarbanes-Oxley
Act.


*Management contract or compensatory plan or arrangement.





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MARVEL ENTERPRISES, INC.

By:/s/----------------------
Allen S. Lipson
President and Chief Executive Officer
Date: March 20, 2003

31


POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
Allen S. Lipson his true and lawful attorney-in-fact with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report and to
cause the same to be filed, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing whatsoever requisite or desirable to be
done in and about the premises, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things that said attorney-in-fact and agent, or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

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





Signature Title Date
- --------- ------ -------

/s/__________________ President and Chief Executive Officer March 20, 2003
Allen S. Lipson (principal executive officer)

/s/__________________ Chief Financial Officer March 20, 2003
Kenneth P. West (principal financial and accounting officer)

/s/__________________ Chairman of the Board of Directors March 20, 2003
Morton E. Handel

/s/__________________ Director, Vice Chairman of the Board of Directors March 20, 2003
Isaac Perlmutter

/s/__________________ Director March 20, 2003
F. Peter Cuneo

/s/__________________ Director March 20, 2003
Avi Arad

/s/__________________ Director March 20, 2003
Sid Ganis

/s/__________________ Director March 20, 2003
Richard Solar

/s/__________________ Director March 20, 2003
James F. Halpin

/s/__________________ Director March 20, 2003
Lawrence Mittman


32


CERTIFICATION

I, Allen S. Lipson, president and chief executive officer of the registrant,
certify that:

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

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

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

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

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

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

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

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

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


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

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 20, 2003 /s/--------------------------
Allen S. Lipson
President and Chief Executive Officer
principal executive officer

33


CERTIFICATION

I, Kenneth P. West, chief financial officer of the registrant, certify that:

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

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

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

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

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

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

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

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

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


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

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 20, 2003 /s/--------------------------
Kenneth P. West
Chief Financial Officer
principal financial officer


34


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES







Marvel Enterprises, Inc
Report of Independent Auditors ....................................................................................... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002 ........................................................ F-3
Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002 ........................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended
December 31, 2000, 2001 and 2002 ..................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001, and 2002 .......................... F-6
Notes to Consolidated Financial Statements ........................................................................... F-7

Consolidated Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts ........................................................................ F-30

All other schedules prescribed by the accounting regulations of the
Commission are not required or are inapplicable and therefore have been omitted.




F-1



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Marvel Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of Marvel
Enterprises, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 2002.
Our audits also include the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with the 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Marvel
Enterprises, Inc. at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 3 to the consilidated financial statements, on January
1, 2002, the Company adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets".


/S/ ERNST & YOUNG LLP

New York, New York
February 21, 2003

F-2






MARVEL ENTERPRISES, INC.

DECEMBER 31, 2002

CONSOLIDATED BALANCE SHEETS


December 31, December 31,
2001 2002
(in thousands, except
share data)

ASSETS
Current assets:
Cash and cash equivalents ...................................................................... $ 21,591 $ 53,690
Accounts receivable, net ....................................................................... 35,648 43,420
Inventories, net ............................................................................... 20,916 16,036
Income tax receivable .......................................................................... 334 --
Distribution receivable from joint venture, net................................................. -- 2,102
Deferred financing costs ....................................................................... 9,144 667
Prepaid expenses and other current assets ...................................................... 12,594 6,700
--------- ---------
Total current assets ..................................................................... 100,227 122,615

Molds, tools and equipment, net .................................................................. 8,076 6,997
Product and package design costs, net ............................................................ 2,218 859
Goodwill, net .................................................................................... 380,675 365,604
Intangibles, net ................................................................................. 988 649
Accounts receivable, non-current portion ......................................................... 11,890 17,284
Deferred financing costs ......................................................................... 13,357 3,446
Other assets ..................................................................................... 139 65
--------- ---------
Total assets ............................................................................. $ 517,570 $ 517,519
========= =========

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................................... $ 13,052 $ 11,607
Accrued expenses and other current liabilities ................................................. 35,146 48,371
Current portion of credit facility ............................................................. 6,172 --
Administration Expense Claims payable .......................................................... 3,500 1,303
Unsecured creditors payable .................................................................... 5,239 3,034
Deferred revenue ............................................................................... 7,128 25,696
--------- ---------
Total current liabilities ................................................................ 70,237 90,011
Senior notes ..................................................................................... 150,962 150,962
Long term portion of credit facility ............................................................ 30,828 --
Accrued rent ..................................................................................... 1,064 897
Deferred revenue, non-current portion ............................................................ 14,546 --
--------- ---------
Total liabilities ........................................................................ 267,637 241,870
--------- ---------
8% cumulative convertible exchangeable redeemable preferred stock, $.01 par
value, 75,000,000 shares authorized, 20,795,936 issued and outstanding in
2001 and 3,276,544 issued and outstanding in 2002, liquidation preference $10 per share......... 207,975 32,780
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued ....................... -- --
Common stock, $.01 par value, 250,000,000 shares authorized, 42,160,858
issued and 34,766,858 outstanding in 2001 and 68,534,135 issued and
61,140,135 outstanding in 2002 ................................................................. 421 685
Additional paid-in capital ....................................................................... 238,769 486,106
Accumulated deficit .............................................................................. (162,897) (208,419)
Accumulated other comprehensive loss ............................................................. (1,380) (2,548)
--------- ---------
Total stockholders' equity before treasury stock ......................................... 74,913 275,824
Treasury stock, 7,394,000 shares ................................................................. (32,955) (32,955)
--------- ---------
Total stockholders' equity ............................................................... 41,958 242,869
--------- ---------
Total liabilities, redeemable convertible preferred stock and stockholders'
equity ................................................................................... $ 517,570 $ 517,519
========= =========

See Notes to Consolidated Financial Statements.

F-3



MARVEL ENTERPRISES, INC.

DECEMBER 31, 2002

CONSOLIDATED STATEMENTS OF OPERATIONS


Years Ended December 31,
2000 2001 2002
----- ----- ----
(in thousands, except per share
data)
Net sales ............................................................................. $ 231,651 $ 181,224 $ 299,046
Cost of sales ......................................................................... 128,531 88,709 142,103
--------- --------- ---------
Gross profit .......................................................................... 103,120 92,515 156,943
Operating expenses:
Selling, general and administrative .............................................. 107,447 62,048 85,800
Pre-acquisition litigation charge ................................................ -- 3,000 --
Administration Expense Claims payable no longer required ......................... -- (3,474) --
Depreciation and amortization .................................................... 30,651 5,559 5,433
Amortization of goodwill and other intangibles ................................... 24,012 23,764 339
--------- --------- ---------
Total operating expenses ...................................................... 162,110 90,897 91,572
--------- --------- ---------
Other income net....................................................................... -- -- 1,170
Equity in net (loss) income of joint venture .......................................... (263) (325) 13,802
--------- --------- ---------
Operating (loss) income ............................................................... (59,253) 1,293 80,343
Interest expense ...................................................................... 31,901 29,174 41,997
Interest income and other expenses, net .............................................. 4,223 1,055 330
--------- --------- ---------
(Loss) income before income tax expense, extraordinary gain and cumulative effect of
change in accounting principle ........................................................ (86,931) (26,826) 38,676
Income tax expense .................................................................... 2,927 647 11,902
--------- --------- ---------
(Loss) income before extraordinary gain and cumulative effect of
change in accounting principle ........................................................ (89,858) (27,473) 26,774
Extraordinary gain, net of income tax expense of $11,273 .............................. -- 32,738 --
--------- --------- ---------
(Loss) income before cumulative effect of change in accounting principle .............. (89,858) 5,265 26,774
Cumulative effect of change in accounting principle, net of income tax benefit of $3,002 -- -- 4,164
--------- --------- ---------
Net (loss) income ..................................................................... (89,858) 5,265 22,610
--------- --------- ---------
Less: preferred stock dividends ....................................................... 15,395 16,034 68,132
--------- --------- ---------
Net loss attributable to common stock ................................................. $(105,253) $ (10,769) $ (45,522)
========= ========= =========
Basic and diluted net loss per common share:
Loss before extraordinary gain and cumulative effect of
change in accounting principle .................................................. $ (3.13) $ (1.27) $ (1.07)
Extraordinary gain ............................................................. -- 0.96 --
Cumulative effect of change in accounting principle ............................. -- -- (0.11)
--------- --------- ---------
Net loss attributable to common stock ........................................... $ (3.13) $ (0.31) $ (1.18)
========= ========= =========
Weighted average number of basic and diluted shares ............................. 33,667 34,322 38,514
========= ========= =========

See Notes to Consolidated Financial Statements.

F-4





MARVEL ENTERPRISES, INC.

DECEMBER 31, 2002

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME


Accumulated
Common Common Additional Accumulated Other
Stock Stock Paid-In (Deficit) Comprehensive Treasury
Shares Amount Capital Loss Stock Total
(in thousands)

Balance at December 31, 1999 ..................... 33,557 $ 409 $ 215,184 $ (46,875) $-- $ (32,955) $ 135,763
--------- --------- --------- --------- --------- --------- ---------
Issuance of common stock ......................... 80 1 499 -- -- -- 500
Warrants exercised ............................... -- -- 5 -- -- -- 5
Employee stock options exercised ................. 65 1 380 -- -- -- 381
Preferred dividends .............................. -- -- -- (15,395) -- -- (15,395)
Net loss ......................................... -- -- -- (89,858) -- (89,858)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 ..................... 33,702 411 216,068 (152,128) -- (32,955) 31,396

Conversion of preferred to stock to common stock.. 1,065 10 10,234 -- -- -- 10,244
Warrants exercised ............................... -- -- 5 -- -- -- 5
Warrants issued to bank .......................... -- -- 1,980 -- -- -- 1,980
Warrants issued to stockholder/director........... -- -- 10,482 -- -- -- 10,482
Preferred dividends .............................. -- -- -- (16,034) -- -- (16,034)
Net income ....................................... -- -- -- 5,265 -- -- 5,265
Other comprehensive loss ......................... -- -- -- -- (1,380) -- (1,380)
----------
Comprehensive income ............................. -- -- -- -- -- -- 3,885
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 ..................... 34,767 421 238,769 (162,897) (1,380) (32,955) 41,958

Conversion of preferred stock to common stock .... 25,714 257 243,070 -- -- -- 243,327
Warrants exercised by bank ....................... 295 2 (2) -- -- -- --
Warrants issued to stockholder/director........... -- -- 2,567 -- -- -- 2,567
Preferred dividends .............................. -- -- -- (68,132) -- -- (68,132)
Employee stock options exercised ................. 364 5 1,702 -- -- -- 1,707
Net income ....................................... -- -- -- 22,610 -- -- 22,610
Other comprehensive loss ......................... -- -- -- -- (1,168) -- (1,168)
----------
Comprehensive income ............................. -- -- -- -- -- -- 21,442
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2002 ..................... 61,140 $ 685 $ 486,106 $(208,419) $ (2,548) $ (32,955) $ 242,869
========= ========= ========= ========= ========= ========= =========

See Notes to Consolidated Financial Statements.


F-5




MARVEL ENTERPRISES, INC.

DECEMBER 31, 2002

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
2000 2001 2002
--------- ---------- -------
(in thousands)

Net (loss) income ............................................................. $(89,858) $ 5,265 $ 22,610
Adjustments to reconcile net (loss) income to net cash (unsed in) provided
by operating activities:
Depreciation and amortization ............................................ 54,663 29,323 5,772
Provision for doubtful accounts .......................................... 81 3,470 3,335
Amortization of deferred financing charges ............................... 1,384 2,136 21,151
Deferred income taxes .................................................... -- -- 10,907
Pre-acquisition litigation charge ........................................ -- 3,000 --
Administration Expense Claims no longer required ......................... -- (3,474) --
Cumulative effect of change in accounting principle, net of
income tax benefit ..................................................... -- -- 4,164
Extraordinary gain, net of income tax provision .......................... -- (32,738) --
Equity in net loss (income) of joint venture ............................. 263 325 (13,802)
Distributions from joint venture ......................................... -- 1,081 10,031
Changes in operating assets and liabilities:
Accounts receivable ................................................. 16,524 (3,543) (16,501)
Inventories ......................................................... (3,395) 21,864 4,880
Goodwill ............................................................ 798 -- --
Prepaid expenses and other .......................................... (2,809) (5,676) 6,228
Deferred charges and other assets ................................... (1,831) (25) 74
Accounts payable, accrued expenses and other ........................ (49) (11,114) 16,137
-------- -------- --------
Net cash (used in) provided by operating activities ........................... (24,229) 9,894 74,986
-------- -------- --------
Cash flow used in investing activities:
Payment of Administration Expense Claims and unsecured creditor claims ... (3,553) (2,231) (4,402)
Purchases of molds, tools and equipment .................................. (8,483) (4,311) (2,068)
Expenditures for product and package design costs ........................ (6,601) (2,934) (927)
Other intangibles ........................................................ (31) (516) (1)
-------- -------- --------
Net cash used in investing activities ......................................... (18,668) (9,992) (7,398)
-------- -------- --------

Cash flow from financing activities:
Repurchase of senior notes ............................................... -- (32,108) --
Proceeds from (repayments of) credit facility ............................ -- 37,000 (37,000)
Deferred financing costs ................................................. -- (6,011) (196)
Employee stock options exercised ......................................... 381 -- 1,707
Issuance of common stock ................................................. 500 -- --
Proceeds from exercise of stock warrants ................................. 5 5 --
-------- -------- --------
Net cash provided by (used in) financing activities ........................... 886 (1,114) (35,489)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ..................... (42,011) (1,212) 32,099
Cash and cash equivalents at beginning of year ........................... 64,814 22,803 21,591
-------- -------- --------
Cash and cash equivalents at end of year ................................. $ 22,803 $ 21,591 $ 53,690
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid (1) ........................................................ $ 30,348 $ 15,362 $ 29,388
Income taxes paid, net of refunds ........................................ 1,744 2,889 428
Other non-cash transactions:
Preferred stock dividends ............................................. 15,395 16,034 68,132
Value of warrants issued in connection with credit facility ........... -- 12,462 2,567
Value of senior notes received in satisfaction of licensing
fees from a third party ............................................. -- 20,000 --



(1) Interest paid in 2002 includes a payment of $9.1 million relating to the
December 2001 interest amount due to the Company's 12% senior note holders.

See Notes to Consolidated Financial Statements.

F-6


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002


1. Description of Business and Basis of Presentation

Marvel Enterprises, Inc. and its subsidiaries, (the "Company") is one of
the world's most prominent character-based entertainment companies with a
proprietary library of over 4,700 characters, and operates within three
segments, licensing, publishing and toy merchandising and distribution.

The term "MEG" refers to Marvel Entertainment Group, Inc., and its
subsidiaries, prior to the consummation of its acquisition by the Company, and
its emergence from bankruptcy and the term "Toy Biz, Inc." refers to the Company
prior to the consummation of the acquisition.

On October 1, 1998, pursuant to the Plan proposed by the senior secured
lenders of MEG and Toy Biz, Inc. (the "Plan"), MEG became a wholly-owned
subsidiary of Toy Biz, Inc. Toy Biz, Inc. also changed its name to Marvel
Enterprises, Inc. on that date. The acquisition of MEG was accounted for using
the purchase method of accounting. The Plan was confirmed on July 31, 1998 by
the United States District Court for the District of Delaware, which had been
administering the MEG bankruptcy cases, and was approved by the Company's
stockholders at a meeting on September 11, 1998.

In accordance with the Plan, two litigation trusts were formed on the
consummation date of the Plan. Each litigation trust is the legal owner of
litigation claims that formerly belonged to MEG and its subsidiaries. The
primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to
pursue bankruptcy avoidance claims. The primary purpose of the other trust (the
"MAFCO Litigation Trust") is to pursue certain litigation claims against Ronald
O. Perelman and various related entities and individuals. The Company agreed to
lend up to $1.1 million to the Avoidance Litigation Trust and up to $1.0 million
to the MAFCO Litigation Trust, in each case on a revolving basis to fund the
trust's professional fees and expenses. Each litigation trust is obligated to
reimburse the Company for all sums advanced, with simple interest at the rate of
10% per year. Net litigation proceeds of each trust will be distributed to the
trust's beneficiaries only after the trust has, among other things, paid all
sums owed to the Company, released the Company from any further obligation to
make loans to the trust, and established reserves to satisfy indemnification
claims. The Company is entitled to 65.1% of net litigation proceeds from the
Avoidance Litigation Trust. The Company is not entitled to any net litigation
proceeds from the MAFCO Litigation Trust.

F-7



MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

2. Summary of Significant Accounting Policies

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year's presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. Upon consolidation, all significant inter-company accounts
and transactions are eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The principal areas of judgment relate to
provisions for returns, other sales allowances and doubtful accounts, future
revenues from episodic television series, the realizability of inventories,
goodwill and other intangible assets, and the reserve for minimum royalty
guarantees and minimum advances, deferred income tax assets, molds, tools and
equipment, and product and package design costs, the Fleer pension liability,
litigation related accruals, royalties payable, Administration Expense Claims
and the fair valuation of the warrants issued in regard to the 2001 HSBC Credit
Facility. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or
market.

Joint Venture

The Company has entered into an equally owned limited partnership with Sony
Pictures Consumer Products Inc. to pursue licensing opportunities relating to
characters based upon movies or television shows featuring Spider-Man and
produced by Sony Pictures Entertainment Inc. ("Sony Pictures"). The limited
partnership has a fiscal year end of March 31. The Company accounts for the
activity of this joint venture under the equity method.

Molds, Tools, and Equipment

Molds, tools and equipment are stated at cost less accumulated depreciation
and amortization. The Company owns the molds and tools used in production of the
Company's products by third-party manufacturers. For financial reporting
purposes, depreciation and amortization is computed by the straight-line method
generally over a one to three-year period (the estimated selling life of related
products) for molds and tooling costs and over a five-year life for furniture
and fixtures and office equipment. On an ongoing basis, the Company reviews the
lives and carrying value of molds and tools based on the sales and operating
results of the related products. If the facts and circumstances suggest a change
in useful lives or an impairment in the carrying value, the useful lives are
adjusted and unamortized costs are written off accordingly. Write-offs, in
excess of normal amortization, which are included in depreciation and
amortization for the years ended December 31, 2000, 2001 and 2002 were
approximately $9,205,000, $1,295,000, and $660,000, respectively.


F-8


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

Product and Package Design Costs

Product and package design costs are stated at cost less accumulated
depreciation and amortization. The Company capitalizes costs related to product
and package design when such products are determined to be commercially
acceptable. Product design costs include costs relating to the preparation of
precise detailed mechanical drawings and the production of sculptings and other
handcrafted models from which molds and dies are made. Package design costs
include costs relating to art work, modeling and printing separations used in
the production of packaging. For financial reporting purposes, amortization of
product and package design is computed by the straight-line method generally
over a one to three-year period (the estimated selling life of related
products). On an ongoing basis, the Company reviews the useful lives and
carrying value of product and package design costs based on the sales and
operating results of the related products. If the facts and circumstances
suggest a change in useful lives or an impairment in the carrying value, the
useful lives are adjusted and unamortized costs are written off accordingly.
Write-offs, in excess of normal amortization, which are included in amortization
for the years ended December 31, 2000, 2001 and 2002 were approximately
$7,585,000, $1,540,000 and $799,000, respectively.

Goodwill and Other Intangibles

Goodwill and other intangibles are stated at cost less accumulated
amortization. For the years ended December 31, 2000 and 2001, goodwill was
amortized over 20 years. In January 2002, the Company adopted Statement of
Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets",
("SFAS 142"), which requires companies to stop amortizing goodwill and certain
intangible assets with an indefinite useful life. SFAS 142 requires that
goodwill and intangible assets deemed to have an indefinite useful life be
reviewed for impairment upon adoption of SFAS 142 (January 1, 2002) and annually
thereafter or upon the occurrence of an impairment indicator. The Company
performed the first of its annual impairment reviews at December 31, 2002 which
did not result in an impairment charge and will perform its future annual
reviews as of December 31st of each subsequent year.

Other intangible asserts are amortized over 3 to 10 years.

Long-Lived Assets

The Company records impairment losses on long-lived assets used in
operations, including intangible assets, when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.

Deferred Financing Costs

Deferred financing costs, which are mainly costs associated with the
Company's Senior Notes and the Company's HSBC Credit Facility, are amortized
over the term of the related agreements using the effective interest method. See
Note 4 to the Consolidated Financial Statements for further details of the
accelerated amortization of the deferred financing costs associated with the
Company's HSBC Credit Facility during the year ended December 31, 2002.

Comprehensive Income

The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which established standards for reporting and display of
comprehensive income or loss and its components. Comprehensive income or loss
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income represents net income adjusted for the
unrecognized loss related to the minimum pension liability of a former
subsidiary. In accordance with SFAS No. 130, the Company has chosen to disclose
comprehensive loss in the Consolidated Statements of Stockholders' Equity and
Comprehensive Income.


F-9


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

Research and Development

Research and development costs are charged to operations as incurred. For
the years ended December 31, 2000, 2001 and 2002, research and development
expenses were approximately $7,537,000, $3,875,000, and $2,296,000,
respectively.

Revenue Recognition

Sales are recorded upon shipment of merchandise and a provision for future
returns and other sales allowances is established based upon historical
experience and management estimates. These estimates are revised as necessary to
reflect actual experience and market conditions.

Subscription revenues generally are collected in advance for a one year
subscription and are recognized as income on a pro rata basis over the
subscription period.

Income from distribution fees and licensing of characters owned by the
Company are recorded in accordance with the distribution agreement and at the
time characters are available to the licensee and collection is reasonably
assured. Receivables from licensees due more than one year beyond the balance
sheet date are discounted to their present value. Income related to the
production and licensing of the Company's episodic television series is recorded
in accordance with AICPA Statement of Position 00-2 "Accounting by Producers or
Distributors of Films." Under these guidelines, revenue is recognized when the
animated television series is available to the licensee and collection is
reasonably assured.

Advertising Costs

Advertising production costs are expensed when the advertisement is first
run. For the years ended December 31, 2000, 2001, and 2002, advertising expenses
were approximately $36,211,000, $6,637,000, and $5,777,000, respectively. At
December 31, 2001, the Company had approximately $148,000 of prepaid advertising
costs, principally related to production of advertisement that was first run in
fiscal 2002. There are no prepaid advertising costs at December 31, 2002.

Royalties

Minimum guaranteed royalties, as well as royalties in excess of minimum
guarantees, are expensed based on sales of related products. The realizability
of minimum guarantees committed are evaluated by the Company based on the
projected sales of the related products. The Company records impairment losses
on minimum guaranteed royalties when events and circumstances indicate that the
sales will not be sufficient to recover the minimum guaranteed royalty.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and the tax bases of assets and
liabilities and are measured using tax rates and laws that are scheduled to be
in effect when the differences are scheduled to reverse.

Income tax expense includes U.S. and foreign income taxes, including U.S.
Federal taxes on undistributed earnings of foreign subsidiaries to the extent
that such earnings are planned to be remitted.


F-10


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

Foreign Currency Translation

The financial position and results of operations of the Company's Hong Kong
and Mexican subsidiaries are measured using the U.S. dollar as the functional
currency. Assets and liabilities are translated at the exchange rate in effect
at year end. Income statement accounts and cash flows are translated at the
average rate of exchange prevailing during the period. Translation adjustments
have not been material.

Stock Based Compensation

On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"), which provided alternative methods of transition to
the fair value method of accounting for stock-based compensation of SFAS 123
"Accounting for Stock Based Compensation" ("SFAS 123). SFAS No. 148, also
amended the disclosure provisions of SFAS 123 and Accounting Principles Board
("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure in
the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based compensation on reported net
income and earnings per share in annual and interim statements.

In accordance with the provisions of SFAS 148, the Company has elected to
continue to account for its stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related Interpretations. Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on date of grant, no compensation
expense is recognized. For the purposes of SFAS 148 pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting periods. The Company's pro forma information follows:



Years Ended December 31,
2000 2001 2002
(in thousands, except per share
data)

Net (loss) income, as reported ........................................................ $ (89,858) $ 5,265 $ 22,610
Net loss attributable to common stock as reported ..................................... $(105,253) $ (10,769) $ (45,522)
Net loss per share attributable to common stock - diluted as reported ................. $ (3.13) $ (0.31) $ (1.18)
Stock based employee compensation cost, net of tax, if SFAS 123 was applied ........... $ 3,764 $ 5,226 $ 3,935
Pro forma net (loss) income ........................................................... $ (93,622) $ 39 $ 18,675
Pro forma net loss attributable to common stock ....................................... $(109,017) $ (15,995) $ (49,457)
Pro forma net loss per share attributable to common stock - diluted ................... $ (3.24) $ (0.47) $ (1.28)



The fair value for each option grant under the stock option plans was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the various grants made during
2000: risk free interest rates ranging from 6.12% to 6.72%; no dividend yield;
expected volatility of 0.550; and expected life of three years. The weighted
average assumptions for the 2001 grants are: risk free interest rates ranging
from 2.91% to 4.90%; no dividend yield; expected volatility of 0.920; and
expected life of three years. The weighted average assumptions for the 2002
grants are: risk free interest rates ranging from 3.19% to 4.92%; no dividend
yield; expected volatility of 0.83; and expected life of 5 years. The Black
Scholes option pricing model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable.
In addition, the option valuation model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate in management's opinion, the existing
model does not necessarily provide a reliable single measure of the fair value
of its employee stock options.

The effects of applying SFAS 123 for providing pro forma disclosures are
not likely to be representative of the effects on reported net income in future
years.


F-11


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

Fair Value of Financial Instruments

The estimated fair value of certain of the Company's financial instruments,
including cash and cash equivalents, current portion of accounts receivable,
accounts payable and accrued expenses approximate their carrying amounts due to
their short term maturities. The non-current portion of accounts receivable have
been discounted to their net present value, which approximates fair value. The
carrying amount of borrowings under the credit facility are estimated to
approximate their fair value as the stated interest rates approximate current
rates.

The estimated fair values of the Company's Senior Notes and outstanding 8%
Cumulative Convertible Exchangeable Preferred Stock, per value $.01 per share
(8% Preferred Stock") is based on market prices, where available. The carrying
amounts and estimated fair values of these financial instruments were as
follows:




Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- ------ ----------
(in thousands)


Senior Notes ............................................ $150,962 $ 80,010 $150,962 $150,962
8% preferred stock ...................................... $207,975 $ 72,786 $ 32,780 $ 32,541



Concentration of Risk

Substantially all of the Company's toy products are manufactured in China,
which subjects the Company to risks of currency exchange fluctuations,
transportation delays and interruptions, and political and economic disruptions.
The Company's ability to obtain products from its Chinese manufacturers is
dependent upon the United States' trade relationship with China.

Marvel distributes its comic books to the direct market through a major
comic book distributor. Termination of this distribution agreement could
significantly disrupt publishing operations.

Loss Per Share

In accordance with SFAS No. 128 "Earnings Per Share", basic loss per share
is computed by dividing net loss attributable to common stock by the weighted
average number of shares of common stock outstanding during the periods. The
computation of diluted loss per share is similar to the computation of basic
loss per share, except the number of shares is increased assuming the exercise
of dilutive stock options and warrants using the treasury stock method and the
conversion of 8% Preferred Stock using the if-converted method, unless the
effect is anti-dilutive. For the years ended December 31, 2000, 2001 and 2002,
any dilution arising from the Company's outstanding employee stock options and
warrants as well as the assumed conversion of the 8% Preferred Stock was not
included as their effect would have been anti-dilutive.

Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), effective for fiscal
years beginning after December 15, 2001. This standard supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and provides a single accounting model for long-lived assets to
be disposed of. The new standard also supersedes the provisions of APB Opinion
No. 30 with regard to reporting the effects of a disposal of a segment of a
business and required expected future operating losses from discontinued
operations to be displayed in discontinued operations in the periods in which
the losses are incurred. SFAS No. 144 was effective for the Company beginning
with the first quarter of 2002 and its adoption did not have a material impact
on the Company's results of operations or financial position.


F-12


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2000".
SFAS No. 145 revises the criteria for classifying the extinguishment of debt as
extraordinary and the accounting treatment of certain lease modifications. SFAS
No. 145 is effective in fiscal 2003 and is not expected to have a material
impact on the Company's consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS No. 146 provides
guidance on the timing of the recognition of costs associated with exit or
disposal activities. The new guidance requires costs associated with exit or
disposal activities to be recognized when incurred. Previous guidance required
recognition of costs at the date of commitment to an exit or disposal plan. The
provisions of the statement are to be adopted prospectively for exit activities
after December 31, 2002. Although SFAS No. 146 may impact the accounting for
costs related to exit or disposal activities the Company may enter into in the
future, particularly the timing of recognition of these costs, the adoption of
the statement will not have an impact on the Company's present financial
condition or results of operations.

3. Goodwill and Cumulative Effect of Change in Accounting Principle

Effective January 1, 2002, the Company adopted SFAS 142 which requires
companies to stop amortizing goodwill and certain intangible assets with an
indefinite useful life. SFAS 142 requires that goodwill and intangible assets
deemed to have an indefinite useful life be reviewed for impairment upon
adoption of SFAS 142 (January 1, 2002) and annually thereafter or upon the
occurrence of an impairment indicator. The Company will perform its annual
impairment review as of December 31st of each year, which commenced at December
31, 2002.

Under SFAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. The Company's
reporting units are consistent with the operating segments identified in Note 15
to the Consolidated Financial Statements. This methodology of evaluating each
reporting unit separately differs from the Company's previous policy, as
permitted under accounting standards existing at that time, of using
undiscounted cash flows on an enterprise-wide basis to determine if goodwill was
recoverable. The Company determines if the carrying amount of goodwill is
impaired based on discounted anticipated cash flows.

Upon adoption of SFAS 142 in the first quarter of 2002, the Company
initially recorded a one-time, non-cash charge of approximately $4.6 million,
(net of income tax of approximately $2.6 million) or $0.12 per share to reduce
the carrying value of its goodwill, with respect to its toy merchandising and
distribution reporting unit. In the third and fourth quarters of 2002, the
Company recorded adjustments of $0.2 million and $0.2 million, respectively, to
the income tax provision related to this charge so as to properly reflect the
full year effective tax rate. Such charge is non-operational in nature and is
reflected as a cumulative effect of change in accounting principle in the
accompanying Consolidated Statement of Operations for the year ended December
31, 2002. For the year ended December 31, 2002, the net cumulative effect of
this change in accounting principle was $4.2 million ($0.11 per share).


F-13


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

A summary of the Company's goodwill before and after the application of SFAS
142, and total assets as of December 31, 2002, by reporting unit, is as follows
(in thousands):



Goodwill Total Assets
-------------------------------------------------------------- -----------------
Utilization of
Pre-Acquisition
January 1, Net Operating December 31, December 31,
2002 Impairments Loss 2002 2002


Licensing $ 324,193 $ -- $ -- $ 324,193 $ 397,735
Publishing 49,316 -- (7,905) 41,411 75,637
Toy Merchandising
And Distributing 7,166 (7,166) -- -- 44,147
--------- ----------- ------------------ ------------ ---------------
Total $380,675 $ (7,166) $ (7,905) $ 365,604 $ 517,519
========= =========== ================== ============ ===============


Had the Company adopted SFAS 142 on January 1, 2000, the historical loss
attributable to common stockholders and basic and diluted net loss per common
share would have changed to the adjusted amounts indicated below (in thousands
except per share amounts):



Year Ended
December 31,
----------------------
2000 2001
--------- --------
(in thousands, except
per share data)


Loss before extraordinary gain, as reported ............ $ (89,858) $ (27,473)
Net loss attributable to common stock, as reported ..... (105,253) (10,769)
Loss per share before extraordinary gain attributable
to common stock, as reported ........................ (3.13) (1.27)
Net loss per share attributable to common stock, as
reported ............................................... (3.13) (0.31)
Goodwill amortization .................................. 23,769 23,465
Pro forma loss before extraordinary gain ............... (66,089) (4,008)
Pro forma net (loss) income attributable to common
stock .................................................. (81,484) 12,696
Pro forma loss per share before extraordinary gain
attributable to common stock ......................... (2.42) (0.58)
Pro forma net loss per share attributable to common
stock ................................................ $ (2.42) $ 0.37
========= =========


For the years ended December 31, 2000, 2001, and 2002 amortization of
goodwill and other intangibles was approximately $24,012,000, $23,764,000, and
$339,000, respectively.



F-14


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002



4. Details of Certain Balance Sheet Accounts
December 31,
2001 2002
(in thousands)
Accounts receivable, net, consists of the following:

Accounts receivable .......................................... $ 52,761 $ 62,835
Less allowances for:
Doubtful accounts .......................................... (5,275) (7,459)
Advertising, markdowns, returns, volume discounts and other (11,838) (11,956)
--------- ---------
Total ................................................. $ 35,648 $ 43,420
========= =========
Inventories, net, consists of the following:
Toys:
Finished goods ............................................. $ 12,039 $ 7,566
Component parts, raw materials and work-in-process ......... 3,849 706
--------- ---------
Total toys ............................................ 15,888 8,272
Publishing:
Finished goods ............................................. 1,411 1,786
Editorial and raw materials ................................ 3,617 5,978
--------- ---------
Total publishing ...................................... 5,028 7,764
--------- ---------
Total ................................................. $ 20,916 $ 16,036
========= =========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment ................................... $ 3,410 $ 4,971
Office equipment and other ................................... 12,096 11,676
Less accumulated depreciation and amortization ............... (7,430) (9,650)
--------- ---------
Total ................................................. $ 8,076 $ 6,997
========= =========
Product and package design costs, net, consists of the following:
Product design costs ......................................... $ 2,255 $ 2,720
Package design costs ......................................... 864 1,138
Less accumulated amortization ................................ (901) (2,999)
--------- ---------
Total ................................................. $ 2,218 $ 859
========= =========
Goodwill, net, consists of the following:
Goodwill ..................................................... $ 459,012 $ 441,903
Less accumulated amortization ................................ (78,337) (76,299)
--------- ---------
Total ................................................. $ 380,675 $ 365,604
========= =========
Intangibles, net, consists of the following
Patents ...................................................... $ 3,185 $ 3,186
Trademarks ................................................... 1,264 1,264
Less accumulated amortization ................................ (3,461) (3,801)
--------- ---------
Total ................................................. $ 988 $ 649
========= =========
Accounts receivable, non -current portion are due as follows:
2003 ........................................................ $ 7,927 $ --
2004 ........................................................ 3,050 6,538
2005 ........................................................ 1,250 6,293
2006 and thereafter ......................................... 1,600 6,981
Discounting ................................................. (1,937) (2,528)
--------- ---------
Total ................................................. $ 11,890 $ 17,284
========= =========
Accrued expenses and other current liabilities consists
of the following:
Accrued advertising costs .................................... $ 1,817 $ 3,009
Royalties .................................................... 2,737 12,800
Inventory purchases .......................................... 1,443 4,130
Income taxes payable ......................................... 2,051 2,218
Bonuses ...................................................... -- 4,302
MEG acquisition accruals ..................................... 1,857 1,184
Accrued expenses - Fleer sale including pension benefits ..... 3,946 4,982
Pre-acquisition litigation charge ............................ 3,000 3,000
Litigation and legal accruals ................................ 541 4,564
Interest expense ............................................. 9,971 926
Other accrued expenses ....................................... 7,783 7,256
--------- ---------
Total ................................................. $ 35,146 $ 48,371
========= =========


F-15

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

5. Debt Financing

On February 25, 1999, the Company completed a $250.0 million offering of
senior notes in a private placement exempt from registration under the
Securities Act of 1933 (the 'Securities Act") pursuant to Rule 144A under the
Securities Act. On August 20, 1999, the Company completed an exchange offer
under which it exchanged virtually all of those senior notes, which contained
restrictions on transfer, for an equal principal amount of registered,
transferable senior notes (the "Senior Notes"). The Senior Notes are due June
15, 2009 and bear interest at 12% per annum payable semi-annually on June 15th
and December 15th. The Senior Notes may be redeemed beginning June 15, 2004 for
a redemption price of 106% of the principal amount, plus accrued interest. The
redemption price decreases 2% each year after 2004 and will be 100% of the
principal amount, plus accrued interest, beginning June 15, 2007. Principal and
interest on the Senior Notes are guaranteed on a senior basis jointly and
severally by each of the Company's domestic subsidiaries.

During 2001, the Company, through a series of transactions, reacquired an
aggregate $99.0 million principal amount of its Senior Notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The $99.0
million principal amount includes $39.2 million with a fair market value of
approximately $20.0 million (including approximately $0.3 million of accrued
interest) received in satisfaction of advanced licensing fees from a third party
as described in Note 9 to the Consolidated Financial Statements. The principal
amount also includes $46.6 million purchased from Mr. Perlmutter for $26.8
million (including approximately $1.9 million of accrued interest). The Company
recorded an extraordinary gain of $32.7 million, net of write-offs of deferred
financing fees of $3.2 million and income taxes of $11.3 million.

On October 5, 2001, the Company terminated its credit facility with
Citibank and replaced $12.4 million of letters of credit outstanding under the
facility with letters of credit guaranteed by Object Trading Corp., a
corporation wholly owned by Isaac Perlmutter. Mr. Perlmutter is Vice Chairman of
the Company's Board of Directors, an employee of the Company and the Company's
largest stockholder.

On November 30, 2001, the Company and HSBC Bank USA entered into an
agreement for a senior credit facility (the "HSBC Credit Facility") comprised of
a $20.0 million revolving letter of credit facility renewable annually for up to
three years and a $37.0 million multiple draw three year amortizing term loan
facility, which was used to finance the repurchase of a portion of the Company's
Senior Notes. The term loan bore interest at the lender's reserve adjusted LIBOR
rate plus a margin of 3.5%. On August 30, 2002, the Company prepaid $10.0
million of the term loan. In connection with this early repayment of the term
loan, the Company recorded a charge of $4.1 million for the write-off of a
proportionate share of unamortized deferred financing costs associated with the
facility. On December 12, 2002, the Company prepaid the remaining $22.4 million
of the term loan and recorded an additional charge of $7.7 million for the
write-off of the remaining unamortized deferred financing costs associated with
this facility. Approximately $15.8 million of letters of credit previously
issued by Object Trading Corp. were replaced, in connection with the
establishment of the HSBC Credit Facility, by letters of credit issued by HSBC
Bank USA. On December 18, 2002, the Company amended the HSBC Credit Facility to
provide for a $15.0 million revolving credit facility and a $15.0 million letter
of credit facility. As of December 31, 2002, $8.9 million of letters of credit
were outstanding and there were no borrowings under the HSBC revolver. The HSBC
Credit Facility contains customary event of default provisions and covenants
restricting the Company's operations and activities, including the amount of
capital expenditures, and also contains certain covenants relating to the
maintenance of minimum tangible net worth and minimum free cash flow. The HSBC
Credit Facility is secured by (a) a first priority perfected lien in all of the
assets of the Company; and (b) a first priority perfected lien in all of the
capital stock of each of the Company's domestic subsidiaries. Borrowings would
bear interest at prime or LIBOR-plus-2 per annum.

In consideration for the HSBC Credit Facility, the Company issued warrants
to HSBC to purchase up to 750,000 shares of the Company's common stock. These
warrants had an exercise price of $3.62 and a life of five years. The fair value
for the warrants was estimated at the date of issuance using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate of
4.16%;


F-16

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

no dividend yield; expected volatility of 0.924; and expected life of five
years. The aggregate value of approximately $2.0 million was initially included
in deferred financing costs. Due to the prepayment of the term loan, the related
unamortized deferred financing costs which were being amortized over the initial
three year term of the HSBC Credit Facility using the effective interest method
were subsequently written off on an accelerated basis as of December 31, 2002.
In December 2002, HSBC exercised 500,000 warrants and received 295,110 shares of
common stock under a Cashless Exercise Ratio provision of the warrants. As of
December 31, 2002, warrants to purchase 250,000 common shares remained
outstanding with HSBC and were exercised in February 2003.

In connection with the HSBC Credit Facility, the Company and Isaac
Perlmutter entered into a Guaranty and Security Agreement ("Security
Agreement"). Under the terms of the Guaranty, Mr. Perlmutter has guaranteed the
payment of the Company's obligations under the HSBC Credit Facility in an amount
equal to 25% of all principal obligations relating to the HSBC Credit Facility
plus an amount, not to exceed $10.0 million, equal to the difference between the
amount required to be in the cash reserve account maintained by the Company and
the actual amount on deposit in such cash reserve account at the end of each
fiscal quarter; provided that the aggregate amount guaranteed by Mr. Perlmutter
will not exceed $30.0 million. Under the terms of the Security Agreement, Mr.
Perlmutter has provided the creditors under the HSBC Credit Facility with a
security interest in the following types of property, whether currently owned or
subsequently acquired by him: all promissory notes, certificates of deposit,
deposit accounts, checks and other instruments and all insurance or similar
payments or any indemnity payable by reason of loss or damage to or otherwise
with respect to any such property. This guaranty continues with the current HSBC
revolving and letter of credit facilities.

In consideration for the Security Agreement, the Company issued Mr.
Perlmutter immediately exercisable warrants on November 30, 2001 to purchase
3,867,708 shares of the Company's common stock. These warrants have an exercise
price of $3.11 and a life of five years. The aggregate value of the exercisable
warrants was approximately $10.5 million and is included in the Consolidated
Balance Sheet at December 31, 2001 as deferred financing costs. During February
2002, Mr. Perlmutter guaranteed approximately $4.4 million relating to the
Company's corporate office lease agreement as well as certain letters of credit
totaling approximately $0.2 million, which are included within his maximum
guarantee of $30.0 million, for which the Company granted him warrants to
purchase 735,601 shares of common stock at an exercise price of $3.11 and a life
of five years. Based on the cumulative amounts guaranteed by Mr. Perlmutter,
4,603,309 warrants were exercisable as of December 31, 2002. The fair value of
the warrants was estimated at the date of issuance using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate of
4.16%; no dividend yield; expected volatility of 0.92; and expected life of five
years. The aggregate value of the exercisable warrants of approximately $13.0
million was included in the Consolidated Balance Sheet starting in November 2001
as deferred financing costs. Due to the prepayment of the Company's term loan,
all related deferred financing costs, have initially been amortized over the
initial three year term of the HSBC Credit Facility using the effective interest
method and were subsequently written off on an accelerated basis as of December
31, 2002.

6. 8% Cumulative Convertible Exchangeable Preferred Stock and Stockholders'
Equity

Each share of the 8% Preferred Stock is convertible into 1.039 fully paid
and non-assessable shares of common stock of the Company. On November 18, 2002,
the Company completed an Exchange Offer whereby 17.6 million shares (85%) of its
8% Preferred Stock were tendered in exchange for 24.5 million shares of its
common stock utilizing a 1.39 exchange rate. In connection with the Exchange
Offer, the Company recorded a non-cash charge of approximately $55.3 million
(representing the fair value of the additional common shares issued in the
Exchange Offer) as a preferred dividend in the fourth quarter of 2002, in
accordance with SFAS No. 84, "Induced Conversion of Convertible Debt." The
Company is required to redeem the remaining outstanding shares of 8% Preferred
Stock on October 1, 2011 at $10.00 per share plus all accrued and unpaid
dividends. The 8% Preferred Stock generally votes together with the common stock
on all matters. The Company has the option to pay the dividend in cash or as
additional 8% Preferred Stock. On March 31, June 30, September 30 and December
31, 2002, the Company issued 413,067, 400,538, 407,971 and 64,239 shares,


F-17

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

respectively, of 8% Preferred Stock in payment of dividends declared and payable
to stockholders of record on those dates. Conversions of preferred shares into
common shares totaled 1,024,282, and 18,805,122 during the years ended December
31, 2001 and 2002, respectively.

As of December 31, 2002, the Company had reserved shares of common stock for
issuance as follows:





Conversion of 8% Preferred Stock ............................. 3,404,329
Exercise of common stock purchase warrants ................... 4,853,309
Exercise of common stock options ............................. 15,386,418
----------
Total ........................................................ 23,644,056


7. Stock Option Plans

Under the terms of the Company's 1998 Stock Incentive Plan (the "1998
Plan"), incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance units and performance shares
may be granted to officers, employees, consultants and directors of the Company
and its subsidiaries. In November 1998, the Company authorized a maximum
aggregate number of shares of common stock as to which options and rights may be
granted under the Stock Incentive Plan of 6.0 million shares, including options
described below, provided that the number of shares of common stock that may be
the subject of awards granted to any individual during any calendar year may not
exceed one million shares.

In 2001, the Company determined that the number of shares remaining under
the 1998 Plan was insufficient to continue to meet the Company's needs of
attracting and retaining executive officers, directors and other key employees.
The Company also determined that the limit on the number of shares of common
stock that may be the subject of awards granted to an individual during a
calendar year should also be increased to allow the Company to attract and
retain individuals of exceptional talent and importance to the Company. As a
result, on November 28, 2001, the Company adopted an amendment to the 1998 Plan
increasing the number of shares of common stock that may be issued upon exercise
of awards under the 1998 Plan by an additional 10.0 million shares and
increasing the number of such shares that may be the subject of awards granted
to any individual during any calendar year to four million shares.

Information with respect to options under the stock option plans are as
follows:


Weighted
Average
Exercise
Shares Price
--------- ---------

Outstanding at December 31, 1999 .............. 5,284,750 $ 6.22
Canceled ...................................... (763,250) $ 6.13
Exercised ..................................... (64,750) $ 5.88
Granted ....................................... 676,000 $ 5.63
--------- --------
Outstanding at December 31, 2000 .............. 5,132,750 $ 6.21

Canceled ...................................... (1,035,209) $ 5.63
Exercised ..................................... -- $ --
Granted ....................................... 5,685,000 $ 3.37
--------- --------
Outstanding at December 31, 2001 .............. 9,782,541 $ 4.61

Canceled ...................................... (284,208) $ 6.25
Exercised ..................................... (363,832) $ 4.69
Granted ....................................... 1,709,001 $ 7.35
=========== ========
Outstanding at December 31, 2002 .............. 10,843,502 $ 5.00
=========== ========


For the years ended December 31, 2000, 2001 and 2002, there were 2,598,167,
8,205,040 and 8,807,666 exercisable options with a weighted average exercise
price of $6.18, $4.67 and $4.68, respectively.


F-18


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

Stock options outstanding at December 31, 2002 are summarized as follows:



Weighted
Average Weighted Weighted
Outstanding Remaining Average Exercisable Average
Range of Options at Contractual Exercise at Exercise
Exercise Prices December 31, 2002 Life-Years Price December 31, 2002 Price
--------------- ----------------- ---------- -------- ----------------- --------

$2.38 - $3.27 1,471,501 8.41 $ 2.78 1,075,166 $ 2.88
$3.62 - $5.00 4,496,667 5.28 $ 3.73 4,342,667 $ 3.70
$5.59 - $8.30 4,875,334 7.22 $ 6.83 3,389,833 $ 6.50



The weighted average fair value of options granted during 2000, 2001 and
2002 was $2.68, $2.46 and $4.96, respectively.

Options granted in 1998 under the 1998 Plan vest generally in four equal
installments beginning with the date of the grant. Options granted subsequent to
1998, vest generally in three equal installments beginning 12 months after the
date of grant. At December 31, 2002, 4,542,916 shares were available for future
grants of options and rights. At December 31, 2002, the weighted average
remaining contractual life of the options outstanding is 6.58 years.

On November 30 2001, the Company entered into a six year employment
agreement with Mr. Perlmutter. The agreement, among other things provides for a
minimal salary and six year options to purchase 3,950,000 common shares at a
price of $3.62 per share. The options may be exercised at any time. Shares
obtained under the options are restricted shares until they fully vest. The
vesting period for the shares is one third on the fourth, fifth and sixth
anniversary of the agreement. At December 31, 2002, these options were not
exercised in whole or in part.

8. Sales to Major Customers and International Operations

The Company primarily sells its merchandise to major retailers, principally
throughout the United States. Credit is extended based on an evaluation of the
customer's financial condition and generally, collateral is not required. Credit
losses are provided for in the financial statements and have been consistently
within management's expectations.

During the year ended December 31, 2000, the Company's largest three
customers accounted for approximately 19%, 11% and 6% of total net sales. During
the year ended December 31, 2001, the Company's largest three customers
accounted for approximately 9%, 9 % and 4% of total net sales. During the year
ended December 31, 2002, the Company's largest three customers accounted for
approximately 15%, 9% and 4% of total net sales.

The Company's Hong Kong wholly-owned subsidiary supervises the
manufacturing of the Company's products in China and sells such products
internationally. All sales by the Company's Hong Kong subsidiary are made F.O.B.
Hong Kong against letters of credit. During the years ended December 31, 2000,
2001, and 2002 international sales were approximately 28%, 23%, and 23%,
respectively, of total net toy sales. During the years ended December 31, 2000,
2001, and 2002 the Hong Kong operations reported operating income (loss) of
approximately $7,198,000, $519,000 and ($28,000) and income before income taxes
of approximately $7,410,000, $888,000, and $3,000, respectively. At December 31,
2001 and 2002, the Company had assets in Hong Kong of approximately $1,602,000
and $5,480,000, respectively excluding amounts due from the Company. The Hong
Kong subsidiary represented approximately $45,022,000 and $45,024,000,
respectively, of the Company's consolidated retained earnings during the years
ended December 31, 2001 and 2002.


F-19

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

9. Restructuring of Toy Biz Operations

During 2001, the Company entered into a license agreement with TBW covering
the manufacture and sale of toy action figures and accessories of all Marvel
characters other than those based upon movies or television shows featuring
Spider-Man and produced by Sony Pictures. TBW opted to use the Toy Biz name for
marketing purposes, but Marvel has neither an ownership in TBW nor any financial
obligations or guarantees related to TBW. The license agreement has a term of
five and one-half years and included the payment to Marvel of an advanced
royalty of approximately $20.0 million. In addition, the Company and TBW have
entered into other agreements which require Marvel to provide TBW with certain
administrative and management support for which TBW reimburses Marvel. For the
six months ended December 31, 2001 and the year ended December 31, 2002, the
Company was reimbursed approximately $1.7 million and $8.2 million,
respectively, for administrative and management support. As of December 31,
2002, the Company had recognized the total $20.0 million minimum guaranteed
royalty into revenue. The Company will receive cash payments for the future
royalties, as earned, under this agreement.

During 2001, the Company sold the rights and inventory to a FCC approved
toy component to a company controlled by TBW for $3.5 million.

During 2001, the Company entered into a license agreement to manufacture
and distribute a line of toys based on the Lord of the Rings' characters. This
agreement requires minimum royalty payments to New Line Cinema over the three
year term of $15.0 million, $10.0 million of which has been paid as of December
31, 2002. Through December 31, 2002, the Company has recognized $11.9 million,
classified as selling, general and administrative expenses, associated with this
license agreement. Under the present agreement, the Company may continue to sell
Lord of the Rings toys through December 31, 2004.

In addition to toys related to Spider-Man: The Movie characters, the
Company continues to distribute toys based on characters from the Lord of the
Rings. These operations are not affected by the license and other arrangements
with TBW.

10. Income Taxes

Income tax expense is summarized as follows:



Years Ended December 31,
2000 2001 2002
--------- -------- -------
(in thousands)
Current:

Federal ...................... $-- $-- $--
State ........................ 431 384 590
Foreign ...................... 1,698 263 405
------- ------- -------
2,129 647 995
------- ------- -------
Deferred:
Federal ...................... 642 -- 10,907
State ........................ 156 -- --
------- ------- -------
798 -- 10,907
------- ------- -------
Income tax expense ................ $ 2,927 $ 647 $11,902
======= ======= =======



F-20

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

The differences between the statutory Federal income tax rate and the
effective tax rate are attributable to the following:



Years Ended December 31,
2000 2001 2002
----- ---- -----

Federal income tax provision computed at the statutory rate (35.0)% (35.0)% 35.0%
State taxes, net of Federal income tax effect ............. 0.4% 1.0% 0.6%
Non-deductible amortization ............................... 9.2% 31.5% --
Foreign taxes ............................................. 1.5% 1.0% 1.0%
Purchase accounting ....................................... 27.6% 4.5% (5.6)%
Other ..................................................... (0.3)% (0.5)% (0.2)%
----- ----- -----
Total provision for income taxes .......................... 3.4% 2.5% 30.8%
===== ===== =====


For financial statement purposes, the Company records income taxes using a
liability approach which results in the recognition and measurement of deferred
tax assets based on the likelihood of realization of tax benefits in future
years. Deferred taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes and
differences between the fair value of assets acquired in business combinations
accounted for as purchases and their tax bases. The significant components of
the Company's deferred tax assets and liabilities are as follows:


December 31,
2001 2002
(in thousands)
Deferred tax assets:

Accounts receivable ......................... $ 5,599 $ 6,208
Inventories ................................. 2,973 4,085
Sales returns reserves ...................... 2,443 2,169
Employment reserves ......................... 4,073 4,100
Restructuring and other reserves ............ 2,866 5,527
Reserve related to investments .............. 4,293 4,902
Net operating loss carryforwards ............ 75,928 78,399
Tax credit carryforwards .................... 3,145 1,776
Other ....................................... 222 79
--------- ---------
Gross deferred tax assets ................... 101,542 107,245
Less valuation allowance .................... (92,851) (96,737)
--------- ---------
Net deferred tax assets ..................... 8,691 10,508
--------- ---------
Deferred tax liabilities:
Depreciation and amortization ............... 3,620 830
Licensing, net .............................. 5,071 9,678
--------- ---------
Gross deferred tax liabilities .............. 8,691 10,508
--------- ---------
Net deferred tax asset (liability) .......... $-- $--
========= =========


During 2001 and 2002, the Company recorded a valuation allowance against
its deferred tax assets as it was not assured that such assets would be realized
in the future. During 2001 and 2002, the Company recorded deferred income tax
provisions of approximately $10,671,000 and $7,905,000, reducing goodwill,
related to pre-acquisition net operating losses. The valuation allowance at
December 31, 2002 includes $25.1 million which, if realized, will be accounted
for as a reduction of goodwill. The valuation allowance was approximately
$67,119,000 and $106,594,000 at December 31, 1999 and 2000, respectively.


F-21

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

At December 31, 2002, the Company has Federal net operating loss
carryforwards of approximately $132.0 million, which are scheduled to expire in
the years 2017 through 2020. Of the total Federal loss carryforwards,
approximately $39.8 million is subject to a Section 382 limitation.
Additionally, the Company has various state and local net operating loss
carryforwards of approximately $365.4 million, which will expire in various
jurisdictions in years 2005 through 2021. The state and local loss carryforwards
are also generally subject to the Section 382 limitation. As of December 31,
2002, no value has been ascribed in the accompanying financial statements for
either the Federal or state and local net operating loss carryforwards.

11. Quarterly Financial Data (Unaudited)




Summarized quarterly financial information for the years ended December 31,
2001 and 2002 is as follows:

------------------------2001----------------- -------------------2002--------------------
Quarter Ended March 31 June30 September 30 December 31 March 31* June 30 September 30 December 31**
------------- -------- ------ ------------ ----------- -------- ------- ------------ ------------
(in thousands, except per share data)

Net sales .................... $ 42,672 $ 45,932 $ 43,026 $ 49,594 $ 57,222 $ 70,939 $ 84,378 $ 86,507
Gross profit ................. 18,349 23,529 19,838 30,799 28,418 36,680 43,278 48,567
(Loss) income before
extraordinary gain and
cumulative effect of
change in accounting principle (8,687) (7,404) (14,749) 3,367 760 8,381 10,636 6,997
Extraordinary gain ........... -- -- 13,645 19,093 -- -- -- --
Cumulative effect of
change in accounting principle -- -- -- -- 4,561 -- (175) (222)
Net (loss) income ............ (8,687) (7,404) (1,104) 22,460 (3,801) 8,381 10,811 7,219
Preferred dividend requirement 3,968 3,983 4,006 4,077 4,131 4,005 4,080 55,916
Net (loss) income attributable
to common stock .............. (12,655) (11,387) (5,110) 18,383 (7,932) 4,376 6,731 (48,697)
Dilutive net (loss) income
per common share before
extraordinary gain and
cumulative effect of change
in accounting principle ...... $ ( 0.37) $ (0.33) $ ( 0.54) $ (0.02) $ (0.23) $ 0.10 $ 0.17 $ (1.03)



* Quarterly financial data for the quarter ended March 31, 2002 reflects
the adoption of SFAS 142 as a cumulative effect of change in accounting
principle of $4.6 million.

**Quarterly financial data for the quarter ended December 31, 2002 reflects
approximately $9.2 million in amortization of non-cash bank loan costs and
senior note offering costs (see Note 5), an inventory write-down of $2.2 million
related to the shutdown of its Spectra Star product line, $4.8 million related
to the accelerated write-off of prepaid royalties related to the Lord of the
Rings toy license, and approximately $4.4 million for estimated settlement
values associated with litigation matters (see Note 13).

The quarterly period ended December 31, 2001 includes the reversal of
$3,474,000 of Administration Expense Claims Payable no longer required and a
gross profit effect of $1,713,000 related to inventory reserves provided in a
previous year.

The loss per common share computation for each quarter and year are
separate calculations. Accordingly, the sum of the quarterly (loss) income per
common share amounts may not equal the loss per common share for the year.


F-22


MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

12. Related Party Transactions

An affiliate of the Company, which is wholly-owned by Mr. Perlmutter, a
major stockholder, acts as the Company's media consultant in placing the
Company's advertising and receives certain fees and commissions based on the
cost of the placement of such advertising. During the years ended December 31,
2000, 2001, and 2002, the Company paid fees and commissions to the affiliate
totaling approximately $966,000, $159,000, and, $102,000, respectively, relating
to such advertisements.

Avi Arad is an officer, member of the Board of Directors, and stockholder.
The Company incurred royalty expense due to Mr. Arad for toys he invented or
designed of approximately $1,551,000, $866,000 and $684,000 during the years
ended December 31, 2000, 2001, and 2002, respectively. An affiliate of the
Company, which is wholly-owned by Mr. Arad, provides production services in
connection with the Company's animated television series. During the years ended
December 31, 2000, 2001 and 2002, the Company paid production fees to this
affiliate of approximately $20,000, $180,000 and $300,000, respectively. At
December 31, 2001 and 2002, the Company had an obligation to Mr. Arad of
approximately $182,000 and $171,000, respectively, for unpaid royalties as well
as an obligation of approximately $120,000 and $90,000, respectively, for
production fees.

The Company shares office space and certain general and administrative
costs with affiliated entities. Rent allocated to affiliates for the years ended
December 31, 2000, 2001 and 2002 was approximately $67,000, $80,000 and $83,000,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.

The Company paid producer fees in regards to its television series to a
Company wholly owned by an officer and employee of approximately $155,000,
$168,000 and $202,000 during the years ended December 31, 2000, 2001 and 2002,
respectively.

During 2001, the Company reimbursed Mr. Perlmutter for $7,927 in legal fees
in connection with the Security Agreement disclosed in Note 5 to the
Consolidated Financial Statements.

13. Commitments and Contingencies

In June 2000, the Company entered into a lease agreement for a corporate
office facility. The lease term, which is approximately 5 1/2 years, commenced
on or about April 1, 2001 and terminates on July 31, 2006. At December 31, 2002,
approximately $4.4 million of lease payments are being guaranteed by Mr.
Perlmutter (See Note 5 to the Consolidated Financial Statements for further
details.) Rent expense amounted to approximately $2,382,000, $3,439,000 and
$3,173,000 for the years ended December 31, 2000, 2001 and 2002, respectively.

The following table sets forth the Company's Contractual Cash Obligations as of
December 31, 2002:



Contractual
Cash Obligations Payments Due By Period
- ------------------ --------------------------------------------------------
Less than After
(Amounts in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- --------------------- ------------ -------- --------- --------- --------

Long Term Debt $150,962 $ -- $ -- $ -- $150,962
Operating Leases 13,739 3,383 6,810 2,556 990
-------- -------- -------- -------- --------
Total Contractual
Cash Obligations $164,701 $ 3,383 $ 6,810 $ 2,556 $151,952
======== ======== ======== ======== ========


F-23

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

The Company is a party to a lease agreement for a public warehouse in Fife,
Washington . The lease payments associated with this warehouse, which are
estimated to average between $72,000 and $120,000 per year, are based on cubic
feet, measured monthly, and are subject to change depending on the capacity
devoted to the inventory stored at this location.

The Company has a contractual obligation under a studio agreement to spend
approximately $1.5 million and $1.0 million in advertising for the 2002/2003 and
2003/2004 broadcast year, respectively.




The following table sets forth the Company's Other Commercial Commitments as of
December 31, 2002:

- ------------------------ ------------------------------------------------
Other Commercial Amount of Commitment
Commitments Total Expiration Per Period
- ------------------------ ------ ----------------------------------------
Less than Over
(Amounts in thousands) 1 Year 1-3 Years 4-5 Years 5 Years
- ------------------------ -------- --------- --------- --------

Standby Letters of Credit $8,894 $ 250 $8,644 $ -- $ --
------ -------- --------- --------- --------



The Company is obligated to make payments under various royalty agreements
of approximately $5,296,000 and $35,000 during the years ending December 31,
2003 and 2004, respectively.

The Company remains liable in connection with businesses previously sold
and has been indemnified against such liabilities by the purchaser of such
businesses.

Legal Matters

The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.

Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character. In February 2002, the Court granted the Company's motion for
summary judgment. Simon appealed the Court's decision and the hearing on the
appeal was held in June 2002. On November 7, 2002, the United States Court of
Appeals for the Second Circuit reversed the decision of the United States
District Court for the Southern District of New York, which had granted the
Company's motion for summary judgment and remanded the action to the District
Court for trial. A non-jury trial is scheduled to begin on July 16, 2003.

X-Men Litigation. In April 2001, Twentieth Century Fox Film Corporation
("Fox") sued Marvel, Tribune Entertainment Co., Fireworks Communications, Inc.
and Fireworks Television (US), Inc. in the United States District Court,
Southern District of New York, seeking an injunction and damages for alleged
breach of the 1993 X-Men movie license, unfair competition, copyright
infringement and tortious interference with a contract arising from the Mutant X
television show being produced by Tribune and Fireworks under license from
Marvel which was released in the fall of 2001. On the same day Fox filed the
foregoing suit, Marvel commenced an action against Fox in the same court seeking
a declaratory judgment that the license of the Mutant X title and certain Marvel
characters did not breach the 1993 X-Men movie license with Fox. Both suits were

F-24

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

consolidated. The case was settled in February 2003. The settlement included an
extension of time during which Fox may exploit its rights in the "X-Men",
"Daredevil", and "Fantastic Four" properties. Additionally, the settlement
expanded the relationship between Fox and Marvel whereby the parties will
negotiate up to three new film and television deals for additional Marvel
properties during the next two years.

MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company filed an appeal. The Company entered into negotiations and
settled the case in early 2003 at an amount not in excess of the amount provided
for in the accompanying consolidated financial statements.

Brian Hibbs, d/b/a/ Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company and Marvel Entertainment Group, Inc. (the "Marvel Defendants") in New
York Supreme Court, County of New York, alleging that the Marvel Defendants
breached their own Terms of Sale Agreement in connection with the sale of comic
books to members of the purported class, breached their obligation of good faith
and fair dealing(s), fraudulently induced plaintiff and other members of the
purported class to buy comics and unjustly enriched themselves. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. Marvel intends vigorously to defend against the claims made
in this action on their merits.

Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced his previously
threatened action in the United States District Court for the Southern District
of New York, alleging claims for breach of his November 1, 1998 employment
agreement. Mr. Lee claims the right to a 10% profit participation in connection
with the Spider-Man movie and other film and television productions that utilize
Marvel characters. Pursuant to the terms of the Employment Agreement, the
Company is currently paying Mr. Lee a salary of $1.0 million per year and
believes that Mr. Lee's claim is without merit. Marvel has answered the
complaint and denied all of its material allegations.

Adminstration Expense Claims Litigation. While the Company has settled
substantially all Administration Expense Claims, litigation brought by the
Company to contest some of those claims is still pending. The Company estimates
that it may be required to pay approximately $1.3 million of additional
Administration Expense Claims, although there can be no assurance as to the
amount the Company will be required to pay. At December 31, 2002, the Company
had reserves (established in 1998) of $1.3 million for this purpose.

General. In 2002, the Company provided reserves of approximately $4.4
million for estimated settlement amounts associated with certain litigation
matters.

14. Benefits Plans

The Company has a 401(k) Plan covering substantially all of its employees.
In addition, in connection with the 1999 sale of a subsidiary, the Company
retained certain liabilities related to a defined benefit pension plan for
certain of such subsidiaries employees. In prior years, this plan was amended to
freeze the accumulation of benefits and to prohibit new participants. Assuming a
discount rate of 7.00% and an expected rate of return of 9.00%, the accumulated
benefit obligation is approximately $18.7 million (approximately $18.2 million
as of December 31, 2001) of which approximately $4.5 million (approximately $3.3
million as of December 31, 2001) is unfunded at December 31, 2002. Given the
current market conditions, the Company has lowered the future discount rate to
6.75% and the expected rate of return to 8.00% for the 2003 fiscal period. This
amount is recorded as a component of accumulated other comprehensive loss and is
being amortized over


F-25

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

the estimated remaining lives of the participants. Plan expenses for the years
ended December 31, 2000, 2001 and 2002 were not significant.

15. Segment Information

Following the Company's acquisition of MEG, the Company realigned its
businesses into three segments: Toy Merchandising and Distribution, Publishing
and Licensing Segments.

Toy Merchandising and Distribution Segment

The toy merchandising and distribution segment designs, develops, markets
and distributes a limited line of toys to the worldwide marketplace. The
Company's toy products are based upon movies and television shows featuring
Spider-Man and produced by Sony Pictures, and upon the movie trilogy Lord of the
Rings (New Line Cinema). The Spectra Star product line (which is presently
scheduled to be closed mid-2003) designed, produced & sells kites in both mass
market stores and specialty hobby shops. Spectra Star's sales amounted to
approximately $11.6 million for the year ended December 31, 2002. Its total
assets of approximately $11.5 million consist principally of inventory, land and
buildings.

Publishing Segment

The publishing segment creates and publishes comic books and trade
paperbacks principally in North America. Marvel has been publishing comic books
since 1939 and has developed a roster of more than 4,700 Marvel Characters. The
Company's titles feature classic Marvel Super Heroes, Spider-Man, X-Men, the
Incredible Hulk, Daredevil, newly developed Marvel Characters and characters
created by other entities and licensed to the Company.


F-26

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

Licensing Segment

The licensing segment relates to the licensing of or joint ventures
involving the Marvel Characters for use in a wide variety of products, including
toys, electronic games, apparel, accessories, footwear, collectibles and
novelties; in a variety of media, including feature films, television programs,
and destination-based entertainment (e.g., theme parks); and for promotional
use.




Toys Publishing Licensing Corporate Legal
------- ---------- --------- --------- ------
(in thousands)
Year ended December 31, 2000

Net sales ................................................ $ 167,309 $ 45,183 $ 19,159 -- $ 231,651
Gross profit ............................................. 61,651 22,857 18,612 -- 103,120
Operating (loss) income .................................. (45,296) 9,099 (15,485) (7,571) (59,253)

Total capital expenditures ............................... 15,038 41 5 -- 15,084

Identifiable assets for continuing operations ............ $ 109,939 $ 76,808 $ 367,210 $ - $ 553,957
Total identifiable assets ................................ $ 109,939 $ 76,808 $ 367,210 $ - $ 553,957




Toys Publishing Licensing Corporate Legal
------- ---------- --------- --------- ------
(in thousands)
Year ended December 31, 2001

Net sales ................................................. $ 91,708 $ 49,504 $ 40,012 -- $ 181,224
Gross profit .............................................. 26,932 25,577 40,006 -- 92,515
Pre-acquisition litigation charge ......................... -- -- -- (3,000) (3,000)
Operating (loss) income ................................... (5,807) 14,453 5,168 (12,521) 1,293

Total capital expenditures ................................ 7,201 30 14 -- 7,245

Identifiable assets for continuing operations ............. $ 90,856 $ 74,213 $ 352,501 $ - $ 517,570
Total identifiable assets ................................. $ 90,856 $ 74,213 $ 352,501 $ - $ 517,570





Toys Publishing Licensing Corporate Legal
------- ---------- --------- --------- ------
(in thousands)
Year ended December 31, 2002

Net sales .............................................. $154,983 $ 64,501 $ 79,562 -- $299,046
Gross profit ........................................... 48,788 33,060 75,095 -- 156,943
Operating income (loss) ................................ 8,857 19,495 69,294 (17,303) 80,343

Total capital expenditures ............................. 2,973 22 -- -- 2,995

Identifiable assets for continuing operations .......... $ 44,147 $ 75,637 $397,735 $ - $517,519
Total identifiable assets .............................. $ 44,147 $ 75,637 $397,735 $ - $517,519




F-27

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002

16. Supplemental Financial Information

The following represents the supplemental consolidating financial
statements of Marvel Enterprises, Inc., which is the issuer of the Senior Notes,
and its wholly-owned subsidiaries that guarantee the Senior Notes and the
non-guarantor subsidiaries as of December 31, 2001 and 2002 and for each of the
three years in the period ended December 31, 2002.



Issuer And Non-
Guarantors Guarantors Total
---------- ---------- -------
(in thousands)
For The Year Ended December 31, 2000

Net sales ............................... $ 181,554 $ 50,097 $ 231,651
Gross profit ............................ 84,244 18,876 103,120
Operating (loss) income ................. (67,115) 7,862 (59,253)
Net (loss) income ....................... (96,655) 6,797 (89,858)

For The Year Ended December 31, 2001
Net sales ............................... $ 157,893 $ 23,331 $ 181,224
Gross profit ............................ 85,339 7,176 92,515
Operating income ........................ 242 1,051 1,293
Net income .............................. 3,592 1,673 5,265

For The Year Ended December 31, 2002
Net sales ............................... $ 261,154 $ 37,892 $ 299,046
Gross profit ............................ 148,778 8,165 156,943
Operating income ........................ 80,324 19 80,343
Net income (loss) ....................... 22,688 (78) 22,610





Issuer
And Non- Inter-
Guarantors Guarantors Company Total
---------- ---------- --------- ---------
December 31, 2001

Current assets ................... $ 98,481 $ 1,746 $ --- $ 100,227
Non-current assets ............... 414,772 41,019 (38,448) 417,343
--------- --------- --------- ---------
Total assets ..................... $ 513,253 $ 42,765 $ (38,448) $ 517,570
========= ========= ========= =========
Current liabilities .............. 105,033 $ 3,652 $ (38,448) 70,237
Non-current liabilities .......... 197,400 -- -- 197,400
8% Preferred Stock ............... 207,975 -- -- 207,975
Stockholders' equity ............. 2,845 39,113 -- 41,958
--------- --------- --------- ---------
$ 513,253 $ 42,765 $ (38,448) $ 517,570
========= ========= ========= =========

December 31, 2002
Current assets ................... $ 116,169 $ 6,446 $ --- $ 122,615
Non-current assets ............... 392,857 38,945 (36,898) 394,904
--------- --------- --------- ---------
Total assets ..................... $ 509,026 $ 45,391 $ (36,898) $ 517,519
========= ========= ========= =========
Current liabilities .............. $ 120,551 $ 6,358 $ (36,898) $ 90,011
Non-current liabilities .......... 151,859 -- -- 151,859
8% Preferred Stock ............... 32,780 -- -- 32,780
Stockholders' equity ............. 203,836 39,033 -- 242,869
--------- ---------- --------- ---------
$ 509,026 $ 45,391 $ (36,898) $ 517,519
========= ========= ========= =========



F-28

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

December 31, 2002



Issuer
and Non-
Guarantors Guarantors Total
---------- ---------- -----
(in thousands)


Year Ended December 31, 2000
Cash flows from operating activities:
Net (loss) income ................................................ $(96,154) $ 6,296 $(89,858)
======== ======== ========
Net cash used in operating activities ....................... (22,599) (1,630) (24,229)
Net cash used in investing activities ....................... (18,647) (21) (18,668)
Net cash provided by financing activities ................... 886 -- 886
-------- -------- --------
Net decrease in cash ............................................. (40,360) (1,651) (42,011)
Cash, at beginning of year ....................................... 62,651 2,163 64,814
-------- -------- --------
Cash, at end of year ............................................. $ 22,291 $ 512 $ 22,803
======== ======== ========

Year Ended December 31, 2001
Cash flows from operating activities:
Net income ....................................................... $ 3,872 $ 1,393 $ 5,265
======== ======== ========
Net cash provided by operating activities ................... 8,181 632 8,813
Net cash used in investing activities ....................... (8,896) (15) (8,911)
Net cash used in financing activities ....................... (1,114) -- (1,114)
-------- -------- --------
Net (decrease) increase in cash .................................. (1,829) 617 (1,212)
Cash, at beginning of year ....................................... 22,291 512 22,803
-------- -------- --------
Cash, at end of year ............................................. $ 20,462 $ 1,129 $ 21,591
======== ======== ========

Year Ended December 31, 2002
Cash flows from operating activities:
Net income ....................................................... $ 22,688 $ (78) $ 22,610
======== ======== ========
Net cash provided by operating activities ................... 71,924 3,062 74,986
Net cash used in investing activities ....................... (7,398) -- (7,398)
Net cash used in financing activities ....................... (35,489) -- (35,489)
-------- -------- --------
Net increase in cash ............................................. 29,037 3,062 32,099
Cash, at beginning of year ....................................... 20,462 1,129 21,591
-------- -------- --------
Cash, at end of year ............................................. $ 49,499 $ 4,191 $ 53,690
======== ======== ========

17. Subsequent Event (Unaudited)

In March 2003, the Company was enabled to elect, and did elect, to convert
all outstanding shares of 8% Preferred Stock into an aggregate of approximately
3.5 million shares of the Company's common stock.


F-29



MARVEL ENTERPRISES, INC.


SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS




Balance Charged to Sales Charged to Balance
At Beginning or Costs and Other at End
of Period Expenses Accounts Deductions of Period
----------- ---------------- ---------- ---------- ---------
Description (5)
- -------------------------------- (in thousands)

Year Ended December 31, 2000
Allowances included in Accounts
Receivable. Net:
Doubtful accounts--current ......................... $ 3,951 $ 899(3) -- $ 308 $ 4,542
Doubtful accounts--non-current ..................... $ 980 $ (980)(2) -- -- --
Advertising, markdowns, returns,
volume discounts and other ...................... $24,561 $ 32,779(1) -- $37,947 $19,393

Year Ended December 31, 2001
Allowances included in Accounts
Receivable. Net:

Doubtful accounts--current ......................... $ 4,542 $ 3,470(4) -- $ 2,737 $ 5,275
Doubtful accounts--non-current ..................... -- -- -- -- --
Advertising, markdowns, returns,
volume discounts, and other ..................... $19,393 $ 15,037(1) -- $22,592 $11,838

Year Ended December 31, 2002
Allowances included in Accounts
Receivable. Net:

Doubtful accounts--current ......................... $ 5,275 $ 3,335(2) -- $ 1,151 $ 7,459
Doubtful accounts--non-current ..................... -- -- -- -- --
Advertising, markdowns, returns,
volume discounts and other ...................... $11,838 $ 15,718(1) -- $15,600 $11,956



(1) Charged to sales.
(2) Charged to costs and expenses.
(3) $962 charged to costs and expenses and $(63) charged to sales.
(4) $3,693 charged to costs and expenses and $(223) charged to sales.
(5) Allowances utilized and/or paid.