MARVEL ENTERPRISES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2004

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:

Name of each exchange
Title of each class 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: None.

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. |_|

Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). 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 30, 2004, the
last business day of the Registrant's most recently completed second fiscal
quarter, was $1,646,905,269 based on a price of $19.52 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 3, 2005, there
were 105,358,225 outstanding shares of the Registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 and 14) 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.

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:

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.

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
Pictures. Our revenues from sales of toys could be adversely affected if that
licensee, or any of our other significant licensees, experience financial
difficulties or bankruptcy.

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. Our
licensees and we 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 many of our
licensees') is to make products based on the anticipated success of feature film
releases and TV broadcasts. If these releases and broadcasts are not successful,
these products may not be sold profitably or even at all.

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 characters that we license to movie studios 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 events could be delayed or, in some instances, even cancelled.

Toy-production delays or shortfalls, continued concentration of toy
retailers and toy inventory risk. The retail toy business is highly
concentrated. The three largest customers for the toy products which we
manufacture for our resale accounted, in the aggregate, for approximately 56% of
our total toy sales in 2004. 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. Our production of excess products to meet
anticipated retailer demand could 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, and
may consequently lose sales opportunities.

Currency fluctuations and/or 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 are manufactured
for our resale, are manufactured in China, which subjects us to risks of
currency fluctuations, transportation delays and interruptions, and political
and economic disruptions. Appreciation of the Chinese Yuan against the U.S.
Dollar could reduce the profitability of toys that we manufacture in China, and
reduce the demand

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for Marvel licenses by licensees who manufacture in China. Our ability, and that
of our licensees, to obtain products from Chinese manufacturers is dependent
upon the United States' trade relationship with China. The imposition of trade
sanctions on China could result in significant supply disruptions or higher
merchandise costs to us. Our licensees and we 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.

The forward-looking statements in this report 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.

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TABLE OF CONTENTS
PAGE

PART I ........................................................................................................1

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 ........................................................................................................8

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.................................................................8

Item 6. SELECTED FINANCIAL DATA.......................................................................10

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........11

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................27

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................28

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE....................................................................................28

Item 9A. CONTROLS AND PROCEDURES.....................................................................28

Item 9B. OTHER INFORMATION...........................................................................28

PART III .......................................................................................................29

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................29

Item 11. EXECUTIVE COMPENSATION........................................................................29

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.......................................................................................29

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................29

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................29

PART IV ........................................................................................................29

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES....................................................29

SIGNATURES......................................................................................................33

CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE................................F-1

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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.

General

The Company is one of the world's most prominent character-based
entertainment companies, with a proprietary library of over 5,000 characters.
The Company operates in the licensing, publishing and toy businesses in both
domestic and international markets. The Company's library of characters
includes, but is not limited to, Spider-Man, X-Men, The Incredible Hulk, Blade,
Man-Thing, Daredevil, Elektra, The Punisher, Captain America, The Fantastic Four
(including Mr. Fantastic, Human Torch, Invisible Woman and The Thing), Namor,
Nick Fury, Luke Cage, Black Widow, Black Panther, Deathlok, Thor, The Avengers,
Silver Surfer, Ant-Man, Iron Man, Shang-Chi, Power Pack, 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, Publishing segment and
Toy segment. The Company has reevaluated and revised certain revenue and expense
classifications within its internal reporting of segment performance, the same
reporting that is used by executive management to monitor and make decisions on
operating matters. As a result, during the fourth quarter of 2004, the Company
began classifying revenue from its master toy licensee, Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment. Previously, such revenue
and expenses were classified within the Company's Licensing segment. Revenues
from TBW reflect a broader set of efforts on the part of the Company than do
revenues from the Company's other licensees. All TBW toys produced under license
from the Company are created, designed, marketed and sold for TBW by the
Company's Toy segment, under an agency agreement between TBW and the Company.
This is unlike other license arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment involve efforts that are similar in nature to the efforts
associated with the Company's own toys, the Company believes this change will
better aggregate the results derived from Marvel-branded toys developed by
Marvel and more clearly reflect operating results used by management to measure
the performance of the Toy operations. The Company also believes that the
classification of earnings from TBW will better portray trends in Marvel toy
brands designed and marketed by the Company. As a result of this change,
prior-period segment information has been reclassified to conform with the
current year presentation.

The Company and Sony Pictures Entertainment Inc. ("Sony Pictures") 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.
Effective April 2004, the operations of the joint venture have been consolidated
in the Company's accompanying consolidated financial statements. Prior to 2004,
the Company filed financial statements of the joint venture as an amendment to
the Company's Annual Report on Form 10-K.

Licensing

The Licensing segment licenses the Company's characters for use in a
wide variety of products, including toys, electronic games, apparel,
accessories, footwear, collectibles and novelties. As of December 31, 2004, the
Company had over 550 active license contracts in domestic and international
markets. The Licensing segment also receives fees from the execution of
licensing agreements to a variety of media, including feature films, television
programs, video games, animation and destination-based entertainment (including
theme parks), and from the sale of licenses for promotional use.

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Feature Films

The Company has licensed various Marvel characters to major motion
picture studios for use in motion pictures. For example, the Company currently
has licenses with Sony Pictures to produce motion pictures featuring Spider-Man,
Ghost Rider and Luke Cage and with Twentieth Century Fox to produce motion
pictures featuring X-Men, The Fantastic Four and Silver Surfer. Marvel also has
outstanding licenses with studios for a number of its other characters,
including Iron Man, The Punisher and Black Widow. Under these licenses, the
Company generally retains control over merchandising rights and receives at
least 50% of merchandising-based royalty revenue.

Television Programs

The Company also licenses Marvel characters for use in television
programs, which fuel additional brand awareness for the Company's characters.
These television programs have included X-Men: Evolution, a half-hour animated
show that was produced by the Company and is distributed by Warner Brothers and
appeared on the WB Kids! network and the Cartoon Network and on foreign
television stations, and Mutant X, a live action show, which airs on syndicated
television. The most recent Marvel program to be broadcast is a half-hour
animated show, produced by Sony Pictures, featuring Spider-Man. This show aired
in the summer of 2003 on MTV in the United States, and is being marketed for
international distribution. Several live-action and animated television shows
based on other Marvel Characters are currently in development.

Made-for-DVD Animated Feature Films

The Company licenses Marvel characters to an entity controlled by Lions
Gate Films to produce (under the Company's direction) up to ten feature-length
animated films for distribution by Lions Gate directly to the home video market.
The first feature, Ultimate Avengers, is scheduled for release in January 2006.

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 at Marvel Super Hero Island, part of the Islands of Adventure
theme park at Universal Orlando in Orlando, Florida, for character appearances
and short live-action shows at Universal Studios Hollywood and for use in a
Spider-Man attraction at the Universal Studios theme park in Osaka, Japan. In
addition, The Canadian Niagara Group operates a "retail-tainment" destination at
Niagara Falls that incorporates Marvel-based characters into rides, games and
retail space.

Toy Merchandise

As described above under "General," during the fourth quarter of 2004,
the Company began classifying earnings from TBW, and related expenses, within
its Toy segment. Previously, such revenues and expenses were included within the
Company's Licensing segment.

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 and collectibles.

Promotions

Marvel also licenses its characters for use by companies for short-term
tie-in promotions that are executed in forms such as advertisements, premium
programs, sweepstakes and contests to consumers and/or the companies' trade
markets. In the 2005 television broadcast of the Super Bowl, for instance,
Marvel characters were featured in a Visa card commercial that was produced
under license from the Company.

2

Publications

Marvel's Licensing segment licenses Marvel's characters to publishers
located outside the United States for use in foreign-language comic books and
trade paperbacks.

Publishing

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

The Publishing segment'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 that provides a unifying
historical and contextual background for the characters and storylines. The
"Marvel Universe" concept permits Marvel 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 Black Panther and Wolverine have been
developed and are now popular characters in their own right and are featured in
their own comic books. The "Marvel Universe" concept also allows Marvel 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.

Customers, Marketing and Distribution

The Publishing segment's primary target market for its comic books has
been male teenagers and young adults in the 13 to 23 year old age group.
Established readership of Marvel's comic books also extends to readers in their
mid-thirties. Management believes there are two primary purchasers of Marvel'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'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, 2002, 2003 and 2004, approximately
76%, 71% and 70%, respectively, of the Publishing segment's net revenues were
derived from sales to the direct market. Marvel distributes its publications to
the direct market through an unaffiliated entity (Diamond Comic Distributors,
Inc.). Marvel prints periodicals to order for the direct market, thus
eliminating the cost of printing and marketing excess inventory.

For the years ended December 31, 2002, 2003 and 2004, approximately
14%, 12% and 13%, respectively, of the Publishing segment's net revenues were
derived from sales to the mass market. The Publishing segment's sales to the
mass market also include trade paperbacks-compilations of previously printed
material collected to tell a "complete" story.

In addition to revenues from the sale of comic books to the direct
market and the mass market, the Publishing segment derives revenues from sales
of advertising, subscriptions and other publishing activities, such as custom
comics. For the years ended December 31, 2002, 2003 and 2004, approximately 10%,
17% and 17%, respectively, of the Publishing segment's net revenues were derived
from those sources. Advertising income increased roughly 50% from 2002 to 2003,
and was a major driver in this subset. In most of Marvel's comic publications,
ten pages (three glossy cover pages and seven inside pages) are allocated for
advertising. The Publishing segment permits advertisers to advertise in a broad
range of Marvel's comic book publications or to advertise in specific groups of
titles whose readership's age is suited to the advertiser.

3

Toys

Marvel's Toy segment creates, 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 characters that the Company has licensed in,
such as characters from the movie trilogy The Lord of the Rings, the television
shows for Total Nonstop Action ("TNA") wrestling and the movie and television
shows, still in production, based on the character Curious George.

As described above under "General," during the fourth quarter of 2004,
the Company began classifying earnings from TBW, and related expenses, within
its Toy segment. Previously, such revenues and expenses were included within the
Company's Licensing segment.

In July 2001, the Company entered into a 5 1/2 year exclusive licensing
agreement with TBW, an unrelated Hong Kong based company, for the sale and
manufacture of toy action figures and accessories, and certain 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 licensed by the
Company to use the Toy Biz name -- a name also used by the Company -- for
marketing purposes, but the Company has no ownership interest in TBW or in any
of its affiliates, and the Company has no financial obligations or guarantees
related to TBW or any of its affiliates. 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 the Company to participate in their success through ongoing licensing
fees. Under an agency agreement whose term is the same as the license agreement,
Marvel's Toy segment creates, designs and markets products. In addition, the Toy
Segment performs sales and billing, and all inventory management and customer
relations for TBW with respect to Marvel-licensed toys. Marvel receives fees for
all of these services based on the wholesale value of toys sold.

During 2002 and 2004, the only line of products to account for more
than 10% of the Company's consolidated net revenue was the line of toys based
upon Spider-Man: The Movie and upon the movie Spider-Man 2. In 2003, the only
product line accounting for over 10% of the Company's consolidated net revenue
was toys based on the movie trilogy The Lord of The Rings.

Design and Development

The Toy segment 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.

The Toy segment relies on TBW and/or its affiliate to manufacture
directly, and to oversee the manufacture, in China, of most of its products. The
Company uses Acts Testing Labs (H.K.) Ltd., a leading independent
quality-inspection firm, to monitor quality control of the Toy segment's
products.

Customers, Marketing and Distribution

The Toy segment markets and distributes its products in the United
States and internationally, with sales to customers in the United States
accounting for approximately 77%, 76% and 65% of the Company's net toy sales in
2002, 2003 and 2004, respectively. The Toy segment's products are aimed
primarily at boys aged 4-12 and collectors.

Outlets for the Company's toys 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 the Company
and ship them to retail outlets. The Company's customer base for toys is
becoming increasingly concentrated. The Toy segment's three largest customers,
currently Wal-Mart Stores, Inc., Toys 'R' Us, Inc. and Target Stores, Inc. (a
division of Target Corp.), accounted in the aggregate for approximately 56% of
the Company's total toy sales in 2004. Kay-Bee Toy Stores, previously a major
customer, filed for bankruptcy protection in January 2004. The amount owed by
Kay-Bee to the Company, pre-filing, was not significant and shipments of product
(collateralized by letters of credit in advance) continue to Kay-Bee.

The Toy segment produces its products for foreign customers and for
most of its domestic customers to order, and sells them "FOB" East Asia. When
the Toy segment sells products FOB East Asia, title to the products,

4

along with risk of loss, passes to the customer in Asia, where the Toy segment's
products are manufactured. Furthermore, the Toy segment does not sell on either
a guaranteed-sale (returnable) basis or a consignment basis. As a result of its
sales terms and of the license to TBW, the Toy segment has significantly reduced
both the likelihood that the Company will find itself with excess toy inventory
and the exposure of the Company to pressure from retailers for concessions in
the event that retailers have excess Marvel toy inventory. As a result of its
production practices and sales terms, the Toy segment had inventory of only $1.3
million at December 31, 2004. A disadvantage of these practices, however, is
that the Toy segment increases its risk of having fewer products available, in
the event of unforeseen demand, than might otherwise have been sold.

Intellectual Property

The Company believes that its most valuable assets are its library of
proprietary characters, the stories it has published for decades, the associated
copyrights, trademarks and goodwill and the Company's "Marvel" and "Marvel
Comics" trade names. The Company believes that its library of characters and
stories could not easily be replicated. The Company currently conducts an active
program of maintaining and protecting its intellectual property rights in the
United States and in approximately 55 other countries. The Company's principal
trademarks have been registered in the United States and in certain of the
countries in Western Europe, Latin America, Asia (including many Pacific Rim
countries), the Middle East and Africa. While the Company has registered
numerous trademarks in these countries, and expects that its rights will be
protected there, certain countries either do not have laws that protect United
States holders of intellectual property equivalent to laws in the United States,
or Marvel's rights can be difficult to enforce, and there can be no assurance
that the Company's rights will not be violated or its characters "pirated" in
certain 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 increase exposure and awareness. The Company does not do
significant advertising for its Licensing or Publishing segments.

The Company currently engages Tangible Media, Inc. ("Tangible") to
purchase most of its advertising. The Company does not have a long-term contract
with Tangible but makes all purchases of advertising from Tangible on a purchase
order basis. These purchase orders are cancelable by the Company on 30 days'
notice to Tangible. Tangible is an affiliate of Isaac Perlmutter. Mr. Perlmutter
is Chief Executive Officer of the Company, Vice Chairman of the Company's Board
of Directors and the Company's largest stockholder. The Company believes that
the services provided by Tangible are provided on terms and for fees that are at
least as favorable as could be obtained by the Company in transactions with
unrelated media buying agencies. The Company also retains the services of an
unrelated advertising agency.

Competition

The industries in which the Company competes are highly competitive.

The Licensing segment competes with a diverse range of entities that
own intellectual property rights in characters. These include DC Comics (which
is owned by Time Warner, Inc.), The Walt Disney Company, NBC Universal, Inc.
(which is 80%-owned by the General Electric Company) and other
entertainment-related entities. Many of these competitors have greater financial
and other resources than the Company.

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

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The Toy segment competes, on its own behalf and in its capacity as
agent for TBW, with many larger toy companies in the design and development of
new toys, in 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, Inc. 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.

Employees

As of December 31, 2004, the Company employed 230 persons. All
employees of the Company are compensated, in part, by equity or phantom equity
awards, which align their interests with those of the stockholders. The Company
also contracts for creative work on an as-needed basis with over 400 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)
2002 2003 2004
----------------------------- --------------------------- ---------------------------

U.S. Foreign U.S. Foreign U.S. Foreign
---------------------------------------------------------------------------------------

Licensing....... $ 47,565 $ 10,189 $ 106,264 $ 18,185 $ 173,806 $ 40,928
Publishing...... 53,678 10,823 61,363 11,892 72,779 13,164
Toys............ 132,434 44,357 118,687 31,235 140,092 72,699
-------------- -------------- ------------- ------------- ------------- -------------
Total........... $ 233,677 $ 65,369 $ 286,314 $ 61,312 $ 386,677 $ 126,791
============== ============== ============= ============= ============= =============

* $13,560, $54,080, and $11,446 of the domestic toy revenue and $8,248, $10,675
and $3,741 of the foreign toy revenues for 2002, 2003 and 2004, respectively,
are attributable to royalties and service fees from toy sales generated by TBW,
which is based 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 that 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.

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 Marvel's Internet
website, and are posted there as soon as reasonably practicable after Marvel
electronically files them with the Securities and Exchange Commission. Marvel
also makes available on this website its Code of Business Conduct and Ethics,
its Code of Ethics for the Chief Executive Officer and Senior Financial
Officers, its Corporate

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Governance Guidelines and the charters of the following committees of Marvel's
Board of Directors: the Audit Committee, the Compensation Committee and the
Nominating and Corporate Governance Committee. Marvel is providing its Internet
address solely for the information of investors. Marvel does not intend the
address to be an active link or to otherwise incorporate the contents of the
website into this report. Printed copies of the information referred to in this
paragraph are also available on written request sent to: Corporate Secretary,
Marvel Enterprises, Inc., 10 E. 40th Street, New York, New York 10016.

Certification with the New York Stock Exchange

On June 3, 2004, Marvel's Chief Executive Officer filed, with the New
York Stock Exchange, the CEO certification regarding Marvel's compliance with
the exchange's corporate governance listing standards as required by Listed
Company Manual Rule 303A.12.

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 (3) London, England 1,300 Leased
Warehouse (2) Fife, Washington (4) Leased
Rental (2)(5) San Luis, Mexico 190,000 Owned
Office (3) Santa Monica, California 4,900 Leased
Office (3) Tokyo, Japan 3,900 Leased

(1) Used by all segments of the Company. This office is scheduled to be
replaced by another leased office of 65,300 square feet in 2005.
(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 was 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 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.

Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, in New
York State Supreme Court, County of New York, Mr. Hibbs commenced a putative
class action alleging that the Company breached its own Terms of Sale Agreement
to comic book retailers and resellers, breached its obligation of good faith and
fair dealing, fraudulently induced plaintiff and other members of the purported
class to buy comics and unjustly enriched itself. Mr. Hibbs sought certification
of the putative class and his designation as its representative, compensatory
damages of $8 million on each cause of action and punitive damages in an amount
to be determined at trial. The parties have reached a proposed settlement in
which the retailers and resellers would receive a credit to their account with
the Company's exclusive distributor, depending on their prior purchases of
certain comic book issues. The parties tendered that settlement to the Court for
approval, but it was rejected on technical grounds. The parties have appealed
the rejection of the settlement. It is not known when the Appellate Division
will act on this matter or how long it will take for final approval of the
settlement. In the event the matter does not settle, the Company intends to
defend vigorously against the claims made in this action on their merits.

7

Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an action
in the United States District Court for the Southern District of New York,
alleging claims for breach of his November 1, 1998 lifetime employment
agreement. Mr. Lee claims the right to a 10% profit participation in connection
with all film and television productions that utilize Marvel characters. Marvel
has answered the complaint and denied all of its material allegations. After
both Mr. Lee and Marvel made partial summary judgment motions, the Court held
that Mr. Lee is entitled to a 10% profit participation from Marvel's
exploitation of theatrical and television productions, as well as merchandise
that was both based on motion pictures containing Marvel characters and that was
manufactured and sold directly by Marvel. The Court held that Mr. Lee was not
entitled to any participation in merchandise licensed to third parties.
Discovery on the issues of what profit Marvel made is continuing. Because the
Company has historically received only a small portion of its revenues from the
exploitation of theatrical and television productions, as opposed to merchandise
licensing (based on its characters as they appear in its publications and more
recently in theatrical and television productions), the Company does not expect
this litigation to have a material effect on its future business or financial
condition. No trial date has been set.

Tribune Entertainment Company v. Marvel Enterprises, Inc. On October
30, 2003, Tribune Entertainment Company ("Tribune") filed a complaint against
the Company in New York State Supreme Court, New York County. The complaint
alleges three causes of action: fraud, negligent misrepresentation, and breach
of warranty, all in connection with the license from the Company under which
Tribune produced the Mutant X television series. Prior to release of the Mutant
X television series in 2001, both the Company and Tribune were sued by Twentieth
Century Fox Film Corporation ("Fox"), the licensee of the X-Men properties for
motion pictures, among other rights. That suit was settled between the Company
and Fox in February 2003. According to Tribune's complaint, Tribune settled with
Fox on October 3, 2003. On December 11, 2003, the Company filed its answer,
denying all material allegations of Tribune's complaint and asserting
counterclaims. The action is in the discovery phase and no trial date has been
set.

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

During the fourth quarter of 2004, no matters were submitted to a vote
of security holders of the Company.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

The principal United States market in which the Company's common stock
is traded is the New York Stock Exchange. The Company's common stock is not
listed for trading on any other securities exchange registered under the
Securities Exchange Act of 1934. 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.

8

Fiscal Year High Low
- ----------- ---- ---

2003
First Quarter $9.21 $6.11
Second Quarter $16.33 $9.03
Third Quarter $15.83 $11.17
Fourth Quarter $21.09 $15.37

2004
First Quarter $23.56 $18.57
Second Quarter $21.55 $18.67
Third Quarter $19.09 $12.45
Fourth Quarter $20.48 $13.51

The above stock prices have been adjusted for the 3-for-2 common stock
split that was effected by the Company in March 2004.

As of March 4, 2005, the number of holders of record of the Company's
common stock was 2,521.

The Company has not declared any dividends on the common stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Total number of Approximate dollar
shares purchased value of shares
Total number as part of that may yet be
of shares Average price publicly announced purchased under
Period purchased(a) paid per share plans or programs(b) the plans or programs
- ------------------- ---------------- ---------------- -------------------- --------------------

2004

July 26,880 $16.03 -
August 3,232,930 13.56 3,215,200
September - - -
October 1,035,000 13.96 1,035,000
November - - -
December - - -

---------------- --------------------
Total 4,294,810 4,250,200 $42.0 million(c)
================ ====================

(a) This column's figures include 44,610 shares purchased by the
Fleer/Skybox Plan. The Fleer/Skybox Plan's purchases were made
pursuant to irrevocable investment instructions given to the trustee
of the

Fleer/Skybox Plan on May 25, 2004 pursuant to Rule 10b5-1 under the
Securities Exchange Act of 1934. Those instructions required the
trustee to buy and sell Company stock pursuant to a formula through
August 5, 2004.

(b) This column represents the number of shares repurchased through the
share repurchase program announced on July 12, 2004, under which the
Company is authorized to repurchase up to $100 million of its common
stock through January 11, 2006.

(c) As of December 31, 2004.
9

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, 2004. The Company has not declared dividends on its
common stock during any of the periods presented below.

Year Ended December 31,
-----------------------------------------------------------------------------

2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(in thousands, except per share amounts)

Statements of Operations Data:
Net sales............................. $ 231,651 $ 181,224 $ 299,046 $ 347,626 $ 513,468
Operating (loss) income.............. (59,253) 1,293 80,524 167,222 224,413
(Loss) income before income tax
expense, minority interest,
extraordinary gain and cumulative
effect of change in accounting
principle (86,931) (26,826) 38,676 150,372 206,872
(Loss) income from continuing
operations............................ (89,858) (27,473) 26,774 151,648 124,877
(Loss) income from continuing
operations per common share........ (2.09) (0.85) (0.72) 1.50 1.17
Extraordinary item................... -- 32,738 -- -- --
Cumulative effect of change in
accounting principle (1)........... -- -- (4,164) -- --
Net (loss) income (2)................ (89,858) 5,265 22,610 151,648 124,877
Diluted net (loss) income
per common share (2)............... (2.09) (0.21) (0.79) 1.34 1.10
Preferred dividends.................. 15,395 16,034 68,132 1,163 --
Goodwill amortization (1)............ 23,769 23,465 -- -- --
Pro forma net (loss) income from
Continuing operations (1).......... (66,089) (4,008) 26,774 151,648 124,877
Pro forma (loss) income from
continuing operations per share
(1)(2)............................... (1.61) (0.39) (0.72) 1.50 1.17
Pro forma net (loss) income (1)...... (66,089) 28,730 22,610 151,648 124,877
Pro forma diluted net (loss) income
per common share (1)(2).. ......... (1.61) 0.25 (0.79) 1.34 1.10

December 31,
------------ --------------- ---------------- ---------------- ---------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital................. $ 43,067 $ 29,990 $ 32,604 $214,198 $142,231
Total assets.................... 553,957 517,570 517,519 741,857 714,814
Borrowings...................... -- 37,000 -- -- --
Other non-current debt.......... 250,000 150,962 150,962 150,962 --
Redeemable preferred stock...... 202,185 207,975 32,780 -- --
Stockholder's equity............ 31,396 41,958 242,869 469,450 546,500

(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 pro forma amounts indicated above.
(2) Net (loss) income per common share, unlike net (loss) income, is net of
preferred dividends.

10

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, 2004.

Overview

Management Overview of Business Trends

The Company principally operates in three distinct segments: licensing,
publishing and toys. 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.

A key driver of operating results is the successful release of major
entertainment programming, such as movies, published materials and television
shows, based on the Company's characters, which fuels demands for all products
based on the featured characters. In 2004, the Company had one major theatrical
release that fueled growth in its businesses: Spider-Man 2. This release
resulted in increased awareness of this character family, which subsequently
drove sales of Marvel-branded licensed products, published materials and toys
based on this character. The Company's results are partially dependent on the
successful release of theatrical films and acceptance of products developed for
the characters appearing in the films. Marvel is also involved in the creative
direction of all entertainment projects based on its characters.

The Company and Sony Pictures have entered into a joint venture, called
Spider-Man Merchandising LP (the "Joint Venture") for the purpose of pursuing
licensing opportunities relating to characters based upon movies or television
shows featuring Spider-Man and produced by Sony Pictures. In May 2004, Sony
Pictures and Marvel settled various disputed matters and, among other matters,
altered the distribution of net receipts of the Joint Venture effective April 1,
2004. As a result of this settlement, effective April 1, 2004, the operations of
the Joint Venture have been consolidated in the Company's consolidated financial
statements.

The Company has reevaluated and revised certain revenue and expense
classifications within its internal reporting of segment performance, the same
reporting that is used by executive management to monitor and make decisions on
operating matters. As a result, during the fourth quarter of 2004, the Company
began classifying revenue from its master toy licensee, Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment. Previously, such revenue
and expenses were classified within the Company's Licensing segment. Revenues
from TBW reflect a broader set of efforts on the part of the Company than do
revenues from the Company's other licensees. All TBW toys produced under license
from the Company are created, designed, marketed and sold for TBW by the
Company's Toy segment, under an agency agreement between TBW and the Company.
This is unlike other license arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment involve efforts that are similar in nature to the efforts
associated with the Company's own toys, the Company believes this change will
better aggregate the results derived from Marvel-branded toys developed by
Marvel and more clearly reflect operating results used by management to measure
the performance of the Toy operations. The Company also believes that the
classification of earnings from TBW will better portray trends in Marvel toy
brands designed and marketed by the Company. As a result of this change, segment
information for the years ended December 31, 2003 and 2002 has been reclassified
as follows:

11

Year Ended December 31, 2003 Year Ended December 31, 2002
-------------- -------------- ------------ ------------- --------------- -----------
Previously Reclass As Previously Reclass As
Reported Adjustment Adjusted Reported Adjustment Adjusted
-------------- -------------- ------------ ------------- --------------- -----------
(in millions)

Net Sales
Licensing.......... $189.2 $ (64.8) $124.4 $79.6 $ (21.8) $57.8
Toys............... 85.2 64.8 150.0 155.0 21.8 176.8
Gross Profit
Licensing.......... 189.2 (64.8) 124.4 75.1 (21.8) 53.3
Toys............... 40.0 64.8 104.8 48.8 21.8 70.6
Selling, General and
Administrative
Licensing.......... 61.1 (8.6) 52.5 19.5 - 19.5
Toys............... 14.8 8.6 23.4 34.3 - 34.3
Operating Income
Licensing.......... 139.4 (56.2) 83.2 69.4 (21.8) 47.6
Toys............... 21.7 56.2 77.9 8.8 21.8 30.6

Licensing

Marvel's Licensing segment is responsible for the merchandising,
licensing and promotions for Marvel's characters worldwide. The Licensing
segment expanded its overseas businesses in 2004 through newly established
offices located in London and Tokyo. The Licensing segment is pursuing a
strategy of concentrating its licensee relationships in a smaller number of
high-quality licensees, and negotiating higher guaranteed royalty amounts from
each licensee. The Licensing segment is also focusing on entering into licenses
in new product categories, such as the wireless category, which was first
licensed in late-2004. The Company typically enters into multi-year merchandise
license agreements that specify guaranteed minimum royalty payments and include
a significant down-payment upon signing. The Company recognizes license revenue
when it satisfies the requirements of completing the earnings process, which is
normally upon the effective date of the agreement. The remaining balance of the
guaranteed payments, reflected as accounts receivable, is due in accordance with
the periodic schedule as specified in each agreement. If sales of the licensee's
merchandise are high enough to entitle the Company to royalties in excess of the
amount of the minimum royalty guarantee (which excess amounts are defined as
"overages"), the Company receives the remaining balance of the guaranteed
payment sooner than provided for in the agreement's payment schedule. Overages
are not recognized as revenue, in most cases, until the minimum guaranteed
payments are fully collected. Licensing fees collected in advance of the period
in which revenue would be recognized are recorded as deferred revenue.

Publishing

Marvel's Publishing segment is in the process of expanding its
advertising and promotions business with an increased emphasis on custom comics
and in-school marketing. The publishing business will also continue its
long-term focus on expanding distribution to new channels, like the mass market,
and expanding its product line to target new demographics, although the Company
does not expect these initiatives to have a significant impact on 2005 revenue.
Growth in 2005 is expected to come largely from expansion of the core product
lines of comics and trade paperbacks, and increased advertising and custom
publishing sales due to the anticipated effects of future media events.

Toys

The 2005 business outlook for toys is closely tied to the scheduled
release in July of the movie Fantastic Four. This film is one of the Toy
Industry's most highly anticipated events of 2005, and retailers have developed
strategies to fully embrace the Fantastic Four property. However, no one can
guarantee the box office success of a

12

movie release. In addition, the company should benefit from continuing sales of
other brands in the Marvel Universe of characters.

The only toys produced by or for the account of the Company during
2002, 2003 and 2004 were (i) toys based on Spider-Man movies and television
shows produced by Sony Pictures, and (ii) toys based on the Lord of the Rings
movie trilogy.

The Company has licensed the right to make all other toys based on
Marvel characters to licensees. TBW is the master toy license for action figures
and accessories. Marvel does the product development, marketing and sales for
TBW, and the Company records income from TBW, and related expenses, in the Toy
segment. All royalties received by the Company from the sales of other licensed
toys are recorded as royalties in the Company's Licensing segment, as the
Company does no product development, marketing, sales or other services for
these licensees.

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 the Company's toys, including, during 2002, 2003 and 2004,
Spider-Man Movie Toys and toys based on characters from the Lord of the Rings
movie trilogy, as well as kites through the Company's Spectra Star product line
(which was closed in mid-2003).

Sales Mix by Segments: Years Ended December 31,
- ---------------------------------------------------------------------------
2002 2003 2004
---- ---- ----
Licensing........................ 19.3% 35.8% 41.8%
Publishing....................... 21.6% 21.1% 16.8%
Toys............................. 59.1% 43.1% 41.4%
----- ----- -----
Net Sales........................ 100.0% 100.0% 100.0%
====== ====== ======

Licensing net sales increased in absolute dollars and as a percentage
of net sales due to the success of consumer products licensing surrounding 2004
movie releases, particularly Spider-Man 2, and continued momentum in domestic
and international contract renewals and expanded volume in new categories and
new markets. Net sales in the Toy segment increased in absolute dollars and as a
percentage of total net sales as sales of toys based on Spider-Man 2 increased
due to the movie's release in June 2004. The Company expects that, in 2005, toy
revenues will decrease as a percentage of total sales and licensing will become
the Company's top revenue-producing segment. This anticipated shift is because
the best selling Marvel toys in 2004 were Spider-Man movie toys, which are
produced by the Company and for which the entire wholesale sales price is
recorded as revenues. The main toy line in 2005 is expected to be Fantastic Four
movie toys, which will be produced by TBW under its Marvel license and for which
only the royalty and service fee percentages of the wholesale sales price will
be recorded as revenue. Publishing net sales continue to increase in absolute
dollars, but are remaining essentially flat as a percentage of total sales. This
is due to slower sales growth in this segment compared to the growth in the
Licensing segment.

During 2001, the Company entered into a 5 1/2-year exclusive licensing
agreement with TBW, an unrelated Hong Kong company, for the sale and manufacture
of toy action figures and accessories, and certain 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 licensed by the
Company to use the Toy Biz name -- a name also used by the Company -- for
marketing purposes, but the Company has no ownership interest in TBW or in any
of its affiliates, and the Company has no financial obligations or guarantees
related to TBW or any of its affiliates. The agreement represents 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 it
enabling the Company to participate in their success through ongoing licensing
fees. Under an agency agreement whose term is the same as the license

13

agreement, Marvel's Toy segment does product design, marketing and sales for TBW
with respect to Marvel-licensed toys, and receives fees for these services based
on the wholesale value of toys sold. As explained in "BUSINESS -- General"
above, during the fourth quarter of 2004 the Company began classifying earnings
from TBW, and related expenses, within its Toy segment. Previously, such
revenues and expenses were included within the Company's Licensing segment.

The Company's Toy segment markets and distributes toys including,
during the period covered by this report, Spider-Man movie toys and toys based
on the Lord of the Rings movie trilogy. In addition, the Company has recently
signed licenses to develop, market and distribute toys based on the upcoming
movie and television show featuring Curious George (the movie release and
television show initial broadcast are scheduled for February 2006 and Fall 2006,
respectively) and Total Nonstop Action ("TNA") Wrestling. Initial shipments of
these two toy lines are expected in 2005.

An affiliate of TBW performs certain administrative oversight duties in
connection with the Company's toy manufacturing operations in China, for which
the Company pays a commission.

Operating Expenses: Cost of Sales

Licensing Segment: During the twelve months ended December 31, 2002,
2003 and 2004, there were generally no material cost of sales associated with
the licensing of the Company's characters.

Publishing Segment: 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
contracts the printing of its comic books to unaffiliated companies. The
Company's cost of printing is subject to fluctuations in paper prices.

Toy Segment: 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's toy
manufacturing takes place in China. A substantial portion of the Company's toy
manufacturing contracts are denominated in Hong Kong dollars.

Operating Expenses: Selling, General and Administrative

General Corporate Overhead: Selling, general and administrative costs
consist primarily of payroll, rent and legal costs associated with active
litigation matters.

Licensing Segment: Selling, general and administrative costs consist
primarily of payroll and royalties owed to movie studios for their share of
license income. The Company generally pays movie studios up to 50% of
merchandising-based royalty revenue from the licensing of both "classic" and
"movie" versions of characters featured in the film.

Publishing Segment: Selling, general and administrative costs consist
primarily of payroll, distribution fees and other miscellaneous overhead costs.

Toy Segment: Selling, general and administrative costs consist
primarily of payroll, advertising, development costs, merchandise royalties
payable to movie studios on toys based on Marvel characters portrayed in movie
releases, and royalties payable on toys based on characters licensed from third
parties, such as New Line Cinema (licensor of the Lord of the Rings characters),
and on toys developed by outside inventors.

Operating Expenses: Depreciation and Amortization

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets", and accordingly no longer amortizes goodwill, but
is subject to annual impairment tests in accordance with the statement (See Note
3 to the Consolidated Financial Statements). The Company's impairment reviews,
performed at December 31, 2002, 2003 and 2004, did not result in an impairment
charge.

14

Tooling, product design and development and packaging design costs,
which are attributable to the toy business, are normally amortized over the life
of the respective product. Amortization of such costs amounted to $4.2 million,
$2.8 million and $2.6 million during 2002, 2003 and 2004, respectively.

Results of Operations of the Company

Year ended December 31, 2004 compared with year ended December 31, 2003

Net Sales

Years Ended December 31,
2003 2004 Change
------------------------------------
(dollars in millions)

Licensing........................ $124.4 $214.7 73%
Publishing....................... 73.3 86.0 17%
Toys............................. 149.9 212.8 42%
----------- ----------
Total............................ $347.6 $513.5 48%
=========== ==========

The Company's net revenue increased $165.9 million or 48% to $513.5
million for the year ended December 31, 2004 from $347.6 million in 2003. This
overall growth was driven by a significant increase in the Licensing and Toy
segments. Growth in licensing primarily resulted from the consolidation of the
Joint Venture sales and strong growth in international licensing. The Toy
segment increase resulted from strong sales of toys based on the Spider-Man 2
movie, which was released in June 2004. The improvements across the various
operating segments are detailed as follows:

Licensing revenue increased by $90.3 million or 73% to $214.7 million
(from $124.4 million in the 2003 period). Factors contributing to this increase
include the consolidation of the Joint Venture, which added $67.5 million in
sales in 2004 compared to none in 2003, when Marvel's net share was recorded as
equity income. Another major driver was international consumer product licensing
(exclusive of the effects of the consolidation of the Joint Venture), which
increased $14.5 million or 100% to $28.4 million (from $13.9 million in 2003)
due to the success of international licensing offices opened early in 2004.

Toy segment revenues increased by $62.9 million or 42% to $212.8
million (from $149.9 million in the 2003 period). This increase was primarily
due to growing sales of products based upon Spider-Man 2 (released in June 2004)
which are produced by the Company (revenues for which are recorded based on the
entire wholesale sales price). This increase offset a decline in royalty and
service fee income derived from TBW's sales of other action figures and
accessories based on Marvel characters. It is anticipated that toy sales will
decline in 2005 as the major toy lines will be based on the Fantastic Four
movie, which will be produced by TBW (revenue for which is based on royalty and
service fee percentages of the wholesale sales price).

Publishing's revenue increased by $12.7 million or 17% to $86.0 million
(from $73.3 million in the 2003 period) due to an increase in sales of comic
books, advertising income and custom publishing projects. Revenue from the
direct market (specialty comic retail stores) increased $8.1 million to $60.0
million in 2004 (from $51.9 million in 2003) and consists of sales of comic
books and trade paperbacks. According to the publication Comics & Games
Retailer, Marvel held an approximate 47% share of the North American comic
market sold through specialty comic retail stores in 2004, compared with an
approximate 41% share in 2003. Advertising income increased $3.0 million or 47%
to $9.4 million in 2004 due to the inclusion of revenues derived from Cover
Concepts, an acquisition completed in December 2003.

15

Gross Profit

Years Ended December 31,
2003 2004
Amount Margin Amount Margin
------ ------ ------ ------
(dollars in millions)

Licensing................ $124.4 100% $214.7 100%
Publishing............... 39.0 53% 49.0 57%
Toys..................... 104.8 70% 90.2 42%
----------- ------------
Total.................... $268.2 77% $353.9 69%
=========== ============

Gross profit increased by $85.7 million to $353.9 million in 2004 as
compared to $268.2 million in 2003. The growth in Toy segment revenues (where
gross profit as a percentage of sales is the lowest of all the segments), as a
percentage of total revenues, decreased the Company's consolidated gross profit
as a percentage of sales to 69% in 2004 from 77% in 2003.

Selling, General and Administrative Expenses

Years Ended December 31,
2003 2004
% of Net % of Net
-------- --------
Amount Sales Amount Sales
------ ----- ------ -----
(dollars in millions)

Licensing................ $52.5 42% $70.0 33%
Publishing............... 13.6 19% 14.1 16%
Toys..................... 23.4 16% 30.0 14%
Corporate................ 19.4 N/A 28.7 N/A
----------- ------------
Total.................... $108.9 31% $142.8 28%
=========== ============

Selling, general and administrative (SG&A) expenses increased $33.9
million to $142.8 million in 2004 from $108.9 million in 2003; however, as a
percentage of sales, SG&A expenses decreased to 28% in 2004 versus 31% in 2003,
as revenue growth of 48% outpaced the 28% increase in SG&A. The lower growth
rate in SG&A was partially the result of minimal growth in royalty expense
payable to movie studios, as the royalties related to the Joint Venture are
reflected as minority interest. Included in Corporate SG&A is a $4.0 million
charge related to the early termination of a lease.

Equity in Net Income of Joint Venture

For the year ended December 31, 2004, the Company recognized $8.1
million in income as compared to $10.9 million in the comparable 2003 period in
connection with its share in the Joint Venture. In April 2004, the Company
resolved litigation with Sony and mutually agreed to restructure its
relationship, which resulted in the consolidation of the operations of the Joint
Venture in the Company's Licensing segment, rather than accounting for the
Company's share of the Joint Venture's operations under the equity method.

16

Depreciation and Amortization

Depreciation and amortization expense decreased $0.5 million to $3.8
million in the 2004 period (from $4.3 million in the 2003 period).

Amortization of Goodwill

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 such 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 in 2002 for the cumulative effect of the accounting change in the
amount of $4.2 million, net of $3.0 million tax, representing the excess of the
carrying value of the toy merchandising and distribution reporting unit as
compared to its estimated fair value. At December 31, 2002, the net cumulative
effect of this change in accounting principle was $4.2 million. At December 31,
2003 and 2004, there were no indicators of impairment.

Other Income

Other income increased $7.6 million to $9.0 million in the 2004 period
(from $1.4 million in the 2003 period). This increase resulted from insurance
collections totaling $5.0 million as well as $2.4 million in gains recorded in
the Publishing segment for bankruptcy-related settlements.

Operating Income

Years Ended December 31,
2003 2004
% of Net % of Net
-------- --------
Amount Sales Amount Sales
------ ----- ------ -----
(dollars in millions)

Licensing................. $83.2 67% $152.7 71%
Publishing................ 25.5 35% 37.3 43%
Toys...................... 77.9 52% 58.1 27%
Corporate................. (19.4) N/A (23.7) N/A
----------- ------------
Total..................... $167.2 48% $224.4 44%
=========== ============

Operating income increased by $57.2 million to $224.4 million in 2004
as compared to $167.2 million in 2003. The Licensing and Publishing segments'
operating income and margins increased in 2004 compared to 2003. Operating
margins in the Licensing segment increased slightly to 71% while margins in the
Publishing segment increased to 43%, which was partially fueled by gains
recorded as other income in the 2004 period. The decrease in Toy segment
operating income resulted from a shift in revenues based on royalty and service
fee percentages of the wholesale sales price in 2003 (related to toys based on
The Hulk, which were produced by TBW) to toys based on the Spider-Man 2 movie,
for which wholesale sales are recorded as net revenues, resulting in a decline
in Toy operating margins from 2003 to 2004. Corporate overhead increased by $4.3
million to $23.7 million in 2004. The increase was primarily due to a charge of
$4.0 million for the early termination of a lease.

17

Interest expense

Net interest expense increased $1.8 million for the year ended December
31, 2004 as compared to 2003 primarily due to the accelerated write-off of
unamortized debt origination costs associated with the early retirement of debt
in June 2004. Cash interest expense aggregated $18.1 million during the years
ended December 31, 2003 and 2004. Interest income aggregated $1.9 million and
$2.9 million during the years ended December 31, 2003 and 2004, respectively.

Income Taxes

The Company's effective tax rate for the twelve months ended December
31, 2004 (31.2%) was lower than the Federal statutory rate due primarily to the
release of valuation allowances related to state and local net operating loss
carryforwards and the effects of the consolidation of the Joint Venture. During
2004, the Company completely utilized its Federal net operating loss
carryforwards. The Company retains various state and local net operating loss
carryforwards of $336 million, which will expire in various jurisdictions in the
years 2005 through 2023. As of December 31, 2004, there is a valuation allowance
of $0.9 million against certain capital loss and foreign net operating loss
carryforwards, as there is no assurance that such assets will be realized in the
future. The net change in the valuation allowance during the year ended December
31, 2004 was a decrease of $6.2 million. Based upon the Company's positive
operating results and forecasts, the valuation allowance against deferred tax
assets for state and local net operating losses was released.

During 2004, the Internal Revenue Service concluded its examination of
the Company for the 1995 through 1998 years. As expected, the effects of the
resulting adjustments were not material to the Company's financial position,
results of operations or cash flows. The Company is also under examination by
various state and local jurisdictions, the results of which are also not
expected to be material to the Company's financial position, results of
operations or cash flows.

Year ended December 31, 2003 compared with year ended December 31, 2002

Net Sales

Years Ended December 31,
(in millions)
2002 2003 Change
---- ---- ------
Licensing................ $57.7 $124.4 116%
Publishing............... 64.5 73.3 14%
Toys..................... 176.8 149.9 (15%)
----------- -----------
Total.................... $299.0 $347.6 16%
=========== ===========

The Company's net revenue increased $48.6 million or 16% to $347.6
million for the year ended December 31, 2003 from $299.0 million in 2002. This
overall growth was driven by a significant increase in the Licensing segment,
which was partially off-set by a decline in toy revenue. Licensing net sales
benefited from growth in both the domestic and international markets. The
changes across the various operating segments are detailed as follows:

Licensing revenue increased by $66.7 million or 116% to $124.4 million
(from $57.7 million in the 2002 period). This growth reflects the increase in
popularity of Marvel branded products, both domestically and internationally.
Domestic licensing sales increased $58.7 million in 2003 compared to 2002 and
international licensing sales increased $8.0 million in 2003 compared to 2002.

Toy segment revenues decreased by $26.9 million or 15% to $149.9
million (from $176.8 million in the 2002 period). The Toy segment decrease
resulted from a shift in sales from those based on Spider-Man movie toys, for
which the entire wholesale sales price is recorded as net sales, to toys based
on The Hulk and other licensed Marvel characters, revenues for which are based
on royalty and service fee percentages of the wholesale sales price.

18

Publishing revenue increased by $8.8 million or 14% to $73.3 million
(from $64.5 million in the 2002 period) due to an increase in sales of comic
books, advertising income and custom publishing projects. Revenue from the
direct market (specialty comic retail stores) increased $3.0 million to $51.9
million in 2003 (from $48.9 million in 2002) and consists of sales of comic
books and trade paperbacks. 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 both 2003 and 2002.
Advertising income increased $2.1 million or 50% to $6.4 million in 2003,
predominantly fueled by an increase in the number of advertisers.

Gross Profit

Years Ended December 31,
2002 2003
Amount Margin Amount Margin
------ ------ ------ ------
(dollars in millions)

Licensing................ $53.3 92% $124.4 100%
Publishing............... 33.0 51% 39.0 53%
Toys..................... 70.6 40% 104.8 70%
----------- ------------
Total.................... $156.9 52% $268.2 77%
=========== ============

Gross profit increased by $111.3 million to $268.2 million in 2003 as
compared to $156.9 million in 2002. The growth in Licensing revenues as a
percentage of total revenues (where gross profit as a percentage of sales is
100%) increased the Company's consolidated gross profit as a percentage of sales
to 77% in 2003 from 52% in 2002.

Selling, General and Administrative Expenses

Years Ended December 31,
2002 2003
% of Net % of Net
-------- --------
Amount Sales Amount Sales
------ ----- ------ -----
(dollars in millions)

Licensing................ $19.5 34% $52.5 42%
Publishing............... 14.7 23% 13.6 19%
Toys..................... 34.3 19% 23.4 16%
Corporate................ 17.3 N/A 19.4 N/A
----------- ------------
Total.................... $85.8 29% $108.9 31%
=========== ============

Selling, general and administrative ("SG&A") expenses increased $23.1
million to $108.9 million in 2003 from $85.8 million in 2002. As a percentage of
sales, SG&A expenses increased to 31% in 2003 versus 29% in 2002, due primarily
to increases in studio shares, which are royalties to be shared with movie
studios. Studio shares increased to $39.0 million versus $2.3 million in 2002
and were incurred in both the Licensing and Toy segments. SG&A expenses in the
Publishing segment of $13.6 million were comparable to the prior year. The Toy
segment had SG&A expenses of $23.4 million during 2003, down from $34.3 million
in 2002 due predominantly to the accelerated write off of $7.9 million in
prepaid royalties related to the Lord of the Rings toy license from New Line
Cinema.

19

Equity in Net Income of Joint Venture

For the year ended December 31, 2003, the Company recognized $10.9
million in income as compared to $13.8 million in the comparable 2002 period in
connection with its share in the Joint Venture. During 2003 and 2002, the
Company accounted for the activity of the Joint Venture under the equity method.

Depreciation and Amortization

Depreciation and amortization expense decreased $1.5 million to $4.3
million in the 2003 period (from $5.8 million in the 2002 period).

Amortization of Goodwill

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 such 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 in 2002 for the cumulative effect of the accounting change in the
amount of $4.2 million, net of $3.0 million tax, representing the excess of the
carrying value of the toy merchandising and distribution reporting unit as
compared to its estimated fair value. At December 31, 2003, there were no
indicators of impairment.

Operating Income

Years Ended December 31,
2002 2003
% of Net % of Net
-------- --------
Amount Sales Amount Sales
------ ----- ------ -----
(dollars in millions)

Licensing................ $ 47.6 82% $ 83.2 67%
Publishing............... 19.6 30% 25.5 35%
Toys..................... 30.6 17% 77.9 52%
Corporate................ (17.3) N/A (19.4) N/A
----------- ------------
Total ................... $ 80.5 27% $167.2 48%
=========== ============

Operating income increased by $86.7 million to $167.2 million in 2003
as compared to $80.5 million in 2002. Operating margins increased from 27% in
2002 to 48% in 2003, predominantly fueled by increases in the Toy segment.
Operating margins in the Licensing segment decreased slightly to 67% while
margins in the Publishing segment increased to 35%. The dramatic increase in the
Toy segment operating income resulted from strong growth in sales of movie and
classic toy lines. Corporate overhead increased by $2.1 million to $19.4 million
in 2003. The increase was predominantly the result of higher litigation accruals
in 2003 related to active litigation.

Interest Expense

Net interest expense decreased $25.0 million for the year ended
December 31, 2003 as compared to 2002 primarily due to the accelerated write-off
of deferred financing costs of $21.1 million associated with the early repayment
of the Company's three year term bank loan in 2002. Cash interest expense
aggregated $29.4 million and $18.1 million during the years ended December 31,
2002 and 2003, respectively. Interest income aggregated $0.1 million and $1.9
million during the years ended December 31, 2002 and 2003, respectively.

20

Income Taxes

The Company's effective tax rate for the year ended December 31, 2003
(-1.3%) was lower than the Federal statutory rate due primarily to release of a
portion of the valuation allowance against deferred tax assets applicable to the
anticipated utilization of net operating loss ("NOL") carryforwards for which
benefit was not previously recognized. At December 31, 2003, the Company had
Federal NOL carryforwards of $40 million, which were scheduled to expire in
2020. All of the Company's pre-acquisition Federal NOLs were fully utilized by
December 31, 2003 and therefore, the Company's income tax credit for the year
ended December 31, 2003 was net of a non-cash tax provision of $15.1 million
that reduced goodwill and a non cash provision of $8.0 million recorded in the
fourth quarter, representing amortization of a portion of the previously
recorded deferred tax asset. The Company was also subject to tax in certain
state and local jurisdictions. The Company started to provide for income taxes
at a normal effective income tax rate (approximately 40%) effective October 1,
2003.

Due to the inherent difficulty of forecasting certain events and the
success of certain products (e.g., release of feature films or the success of
toy designs), prior to 2003 the Company determined that it did not have
sufficient positive evidence to recognize its deferred tax assets at such time.
However, as a result of the income generated through September 30, 2003 and the
Company's near-term forecasts the Company determined, as of September 30, 2003,
that it did have sufficient positive evidence to recognize its deferred tax
assets and, therefore, the valuation allowance against Federal deferred tax
assets (principally Federal NOLs) was reduced. Release of the valuation
allowance resulted in a one-time $31.5 million ($0.42 basic and diluted per
share for both the three and nine month periods ended September 30, 2003)
deferred tax benefit, which was fully recognized as a credit to income tax
expense in the three month period ended September 30, 2003.

During 2004, the Internal Revenue Service concluded its examination of
the Company for the 1995 through 1998 years. As expected, the effects of the
resulting adjustments were not material to the Company's financial position,
results of operations or cash flows. The Company is also under examination by
various state and local jurisdictions, the results of which are also not
expected to be material to the Company's financial position, results of
operations or cash flows.

Liquidity and Capital Resources

The Company's primary sources of liquidity are its available cash and
cash equivalents and cash flows from operations. The Company anticipates that
its primary uses for liquidity will be to conduct its business and to continue
to pursue its stock repurchase program.

Net cash provided by the Company's operations during the years ended
December 31, 2002, 2003 and 2004 were $75.0 million, $171.0 million and $161.4
million, respectively.

At December 31, 2003 and 2004, the Company had working capital of
$214.2 million and $142.2 million, respectively, including cash, certificates of
deposit and commercial paper of $247.0 million and $204.8 million, respectively.

Earlier in 2004, the Company had outstanding senior notes due June 15,
2009, which bore interest at 12% per annum. The Company redeemed all of such
notes on June 15, 2004 with available cash resources, which resulted in a
non-recurring charge of $3.2 million associated with the accelerated write-off
of previously unamortized deferred financing costs, and a non-recurring charge
of $9.0 million related to the 6% premium necessitated by the terms of the
redemption, both recorded during the second quarter of 2004.

The Company maintains a credit facility with HSBC Bank USA ("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, 2004, $0.3 million
of letters of credit were outstanding and there were no borrowings under the
HSBC revolver. The HSBC

21

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
Company's assets other than its intellectual property; 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-two percent
per annum.

On July 12, 2004, the Company announced a $100 million common stock
repurchase program. Pursuant to the authorization, the Company may, at its
option, purchase shares of its common stock from time to time in the open market
or through privately negotiated transactions through the earlier of January 2006
or such time as $100 million of the Company's shares have been repurchased under
the program. The Company's largest stockholder, Chief Executive Officer and Vice
Chairman, Isaac Perlmutter, and its Chief Creative Officer and the Chairman and
Chief Executive Officer of Marvel Studios, Avi Arad, have each agreed not to
sell any shares while the repurchase program is in place. Through December 31,
2004, the Company repurchased 4.3 million shares of its common stock under the
repurchase program, at an aggregate purchase price of $58.0 million.

As a result of the conclusion of the bankruptcy proceedings of Marvel
Entertainment Group, Inc. in June 2004, the Company will not be required to pay
any further administration expense claims in that bankruptcy.

Capital expenditures by the Company during the years ended December 31,
2002, 2003 and 2004 were $3.0 million, $3.5 million and $3.6 million,
respectively.

The following table sets forth the Company's Contractual Obligations as
of December 31, 2004:

Contractual
Obligations Payments Due By Period
- ----------------------------------------------------------------------------------------------

Less than More Than
(Amounts in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- ----------------------------------------------------------------------------------------------
Long Term Debt Obligations $ -- $ -- $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------
Capital Lease Obligations -- -- -- -- --
- ----------------------------------------------------------------------------------------------
Operating Lease Obligations 11,647 2,432 4,964 3,246 1,005
- ----------------------------------------------------------------------------------------------
Purchase Obligations -- -- -- -- --
- ----------------------------------------------------------------------------------------------
Royalty Obligations 2,750 750 1,000 1,000 --
- ----------------------------------------------------------------------------------------------
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP 165 165 -- -- --
- ----------------------------------------------------------------------------------------------
Expected pension benefit
payments 13,441 1,246 2,456 2,530 7,209
- ----------------------------------------------------------------------------------------------
Total $28,003 $4,593 $8,420 $ 6,776 $8,214
- ----------------------------------------------------------------------------------------------

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 its available cash and cash equivalents, cash
flow from operations, and other sources of liquidity will be sufficient for the
Company to conduct its business and to continue to pursue its stock repurchase
program.

22

Critical Accounting Policies and Estimates

General

Management's discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. Management reviews the accounting
policies the Company uses in reporting its financial results on a regular basis.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, future
revenues from the Company's animated television series, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, management evaluates its 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, royalty participation expense,
income taxes, contingencies and litigation. Management bases its 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 management based its
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 the Company's financial results. Management believes that
the following critical accounting policies affect its more significant judgments
and estimates used in the preparation of the Company's 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 estimated
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. Return rates for returnable comic book sales are
typically higher than those related to toy sales. However, sales to the direct
market, the Company's largest channel of comic book distribution, are made
principally on a no-return basis.

Subscription Revenues

Subscription revenues related to the Company's 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 licensing of characters owned by the Company, are recorded
in accordance with guidance provided in Securities and Exchange Commission Staff
Accounting Bulletin No. 104 "Revenue Recognition" (an amendment of 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,
when the fee is fixed or determinable and when 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, when the license period of the
arrangement has begun and the

23

customer can begin its exhibition, when the arrangement fee is fixed or
determinable, and when collection of the arrangement fee is reasonably assured.

For licenses involving minimum payment obligations to the Company, when
the Company has performed its obligations under the agreement, if any, and
collection is reasonably assured, Staff Accounting Bulletin No. 104 "Revenue
Recognition" (an amendment of Staff Accounting Bulletin No. 101 "Revenue
Recognition") requires that revenue be recognized prior to the collection of all
amounts ultimately due. The Company's license agreements often include
nonrefundable minimum guaranteed royalties which are payable by the licensee
over the life of the agreement. GAAP requires that revenue from licensing be
recognized when substantially all Company obligations, if any, are performed,
generally at the inception of the license, and reasonable assurance of
collectibility is determined. For contracts not providing minimum guaranteed
royalties (e.g., studio licenses), the Company records license revenue when
reported by such licensees (i.e., based upon royalties earned from the sales of
the related character-based merchandise).

Revenue recognized under license agreements during the years December
31, 2002, 2003 and 2004 was generated within the business categories set forth
below. The table does not include revenues from TBW, as such revenue is recorded
in the Company's Toy segment. The "Other" category includes licensing revenue
from domestics, collectibles and other.

Years Ended December 31,
(in thousands)
2002 2003 2004
----------- ----------- ----------

Apparel and Accessories........................ $ 11,346 $39,218 $78,798
Entertainment (including studios, themed.......
attractions and electronic games)............ 39,529 50,589 62,296
Toy royalties.................................. 2,669 14,946 34,217
Other.......................................... 4,210 19,696 39,423
----------- ----------- ----------
Totals......................................... $ 57,754 $124,449 $214,734
=========== =========== ==========

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 uncollectible
amounts are revised each period, and changes are recorded in the period they
become known. A significant change in the level of uncollectible 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 to 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 discontinuance of the Spectra Star product line in 2003, the
Company recorded an additional $2.2 million in inventory reserves during the
fourth quarter of 2002, reflected in the cost of sales of the Toy segment.

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

24

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. The Company assesses the fair value and recoverability of its
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, the Company makes assumptions and estimates regarding future cash
flows and other factors to make its determination. The fair value of the
Company's long-lived assets and goodwill is dependent upon the forecasted
performance of the Company's business, changes in the media and entertainment
industry and the overall economic environment. When the Company determines that
the carrying value of its intangibles and goodwill may not be recoverable, the
Company measures 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 is no longer amortized but is
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 are
also 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
tests 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 annual impairment reviews
at December 31, 2002, 2003 and 2004, which did not result in an impairment
charge, and will perform future annual reviews as of December 31 of each
subsequent year.

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

25

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, in 2002, the Company accelerated the write-off of $7.9 million in
prepaid royalties. These charges are reflected in the selling, general and
administrative expenses in 2002 for the Toy segment.

The Company also shares revenues with movie studios for characters
portrayed in theatrical releases. Typically, the studio is paid roughly 50% of
the total license income derived from both classic and movie licensing for a
specific character, in most cases net of a distribution fee retained by the
Company, and in some instances with some adjustments for characters that have
generated sales prior to the theatrical release. This royalty share acts to
reduce the effective percentage share with the studios. In 2004, 2003 and 2002,
the Company provided for $48.5 million, $40.3 million and $2.3 million,
respectively, for the share of royalties due to movie studios.

Accounting for Joint Venture

The Company entered into the Joint Venture with Sony Pictures to pursue
licensing opportunities relating to characters based upon movies or television
shows featuring Spider-Man and produced by Sony Pictures.

In May 2004, Sony Pictures and Marvel settled various disputed matters
and, among other matters, altered the distribution of net receipts of the Joint
Venture effective April 1, 2004. As a result of this settlement, effective April
1, 2004, the operations of the Joint Venture have been consolidated in the
accompanying consolidated financial statements. Because the Joint Venture is now
consolidated, the Company's results - effective April 1, 2004 - include the
revenues ($67.5 million) and expenses of the Joint Venture for the year ended
December 31, 2004. Minority interest due to Sony Pictures of $8.4 million was
recorded to reflect Sony Pictures' interest in the operations of the Joint
Venture for the nine month period ended December 31, 2004. The Company
distributes to Sony Pictures, on a quarterly basis, all cash received related to
Sony Pictures' interest. Accordingly, minority interest to be distributed is
included as a current liability in the accompanying consolidated balance sheet
as of December 31, 2004. Prior to April 1, 2004, the Company accounted for its
interest in the activity of the Joint Venture under the equity method.

Accounting for Stock-Based Compensation

On December 31, 2002, the FASB issued SFAS No. 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 No. 148 pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.

26

The Company's pro forma information follows:

Years Ended December 31,
------------------------------
2002 2003 2004
---- ---- ----

(in thousands, except per share
data)

Net income, as reported........................................................ $ 22,610 $151,648 $124,877
Net (loss) income attributable to common stock................................. (45,522) 150,485 124,877
Net (loss) income per share attributable to common stock -- diluted............ (0.79) 1.34 1.10
Stock based employee compensation cost, net of tax, if FAS 123 was applied..... 3,935 6,661 10,300
Pro forma net (loss) income.................................................... 18,675 144,987 114,577
Pro forma net (loss) income attributable to common stock....................... (49,457) 143,824 114,577
Pro forma net (loss) income per share attributable to common stock -- diluted.. (0.85) 1.27 1.01

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 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 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

On December 16, 2004, the Financial Accounting Standards Board issued
SFAS No. 123 (revised 2004), ("SFAS 123(R)"), which is a revision of SFAS 123.
SFAS 123(R) supersedes APB 25, and amends SFAS No. 95, "Statement of Cash
Flows". Generally, the approach in SFAS 123(R) is similar to the approach
described in SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. SFAS 123(R) must be adopted no later than July 1, 2005. Early
adoption will be permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 123(R) on July 1, 2005, using the
modified-prospective method as proscribed in SFAS 123(R).

As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have an impact
on the Company's results of operations, although it will have no impact on its
overall financial position. While the Company cannot estimate the level of
share-based payments to be issued in the future, based on the stock options that
are currently outstanding, the Company expects that the adoption of SFAS 123(R)
will result in a $4.0 million charge to operations in the second half of 2005.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. While the Company cannot estimate what those amounts will be in
the future (because they depend on, among other things, when employees exercise
stock options and the fair value of the Company's common stock at such dates),
the amount of operating cash flows recognized in prior periods for such excess
tax deductions was $0 in 2002 and $14.2 million and $3.6 million in 2003 and
2004, respectively.

27

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. In December 2003, the Company opened offices in London,
England and Tokyo, Japan, to expand international licensing. Some of the
Company's international licenses are denominated in other currencies which
subjects the Company to additional currency fluctuation risks.

Additional information relating to the Company's outstanding financial
instruments is included in Item 7 -- Management's 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 and following. 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 11 to the December 31, 2004 Consolidated Financial Statements.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based upon their evaluation of the Company's disclosure controls and
procedures as of the end of the fiscal year covered by this report, the
Company's 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.

Management's Annual Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f). Under the supervision and with the
participation of its management, including its principal executive officer and
principal financial officer, the Company has conducted an evaluation of the
effectiveness of its internal control over financial reporting based on the
framework in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on the Company's
evaluation under the framework in Internal Control -- Integrated Framework, the
Company's management concluded that the Company's internal control over
financial reporting was effective as of December 31, 2004. Ernst & Young LLP,
the registered public accounting firm which has audited the financial statements
included in this report, has issued an attestation report regarding the
Company's management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004, and that attestation
report is attached hereto.

Changes in Internal Controls Over Financial Reporting

During the fourth quarter of 2004, there were no changes in the
Company's internal control over financial reporting that materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

28

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," "Section 16(a) Beneficial Ownership Reporting Compliance"
and "Code of Ethics" (a subsection under "Election of Directors") in the
Company's definitive proxy statement to be filed not later than April 30, 2005,
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, 2005,
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, 2005, 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, 2005, with the Securities and Exchange Commission.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated herein by reference
to the information appearing under the caption "Ratification of Appointment of
Independent Accountants" in the Company's definitive proxy statement to be filed
not later than April 30, 2005, with the Securities and Exchange Commission.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(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) Exhibits. See the Exhibit Index immediately below.

29

EXHIBIT INDEX

Exhibit No.
- -----------

- ------------------------------------------------------------------------------------------------------------------------------------

3(i) Restated Certificate of Incorporation. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
3(ii) Amended and Restated Bylaws, as amended through the date hereof. (Incorporated by reference to Exhibit 3(ii) of the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.)
- ------------------------------------------------------------------------------------------------------------------------------------
4.1 Article V of the Restated Certificate of Incorporation (see Exhibit 3(i), above), defining the rights of holders of
Common Stock.
- ------------------------------------------------------------------------------------------------------------------------------------
4.2 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
4.3 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
4.4 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.1 1998 Stock Incentive Plan, as amended. (Incorporated by reference to Appendix B of the Company's Definitive Proxy
Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 31, 2004.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.2 Form of Stock Option Agreement between the Company and recipients of stock option grants under the Company's 1998
Stock Incentive Plan. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.3(i) Form of Restricted Stock Agreement between the Company and recipients of restricted stock grants under the Company's
1998 Stock Incentive Plan. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.3(ii) Form of Perfomance-Based Restricted Stock Agreement between the Company and recipients of restricted stock grants
under the Company's 1998 Stock Incentive Plan. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------

10.4 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.5 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.)
- ------------------------------------------------------------------------------------------------------------------------------------

30

- ------------------------------------------------------------------------------------------------------------------------------------
10.6 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.7 Amendment, dated November 10, 2004, to Pledge and Security Agreement from the Company and other grantors referred to
therein, as Grantors, to HSBC Bank USA, as administrative agent. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.8 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.9 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.10 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.11 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.12 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.13 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.14 Sublease Termination Agreement dated as of December 30, 2004 between HSBC Bank USA and the Company. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.15 First Amendment, February 24, 2005, to Sublease Termination Agreement between HSBC Bank USA and the Company. (Filed
herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.16 Agreement of Sublease dated as of August 5, 2004, by and between CIBC World Markets Corp. and the Company. (Filed
herewith.) (Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.17 Lease Agreement, dated as of February 15, 2005, by and between 417 Fifth Avenue LLC and the Company (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------

31

- ------------------------------------------------------------------------------------------------------------------------------------
10.18 Share Disposition Agreement, dated as of July 9, 2004, between the Company and Isaac Perlmutter. (Incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.19 Share Disposition Agreement, dated as of July 9, 2004, between the Company and Avi Arad. (Incorporated by reference
to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.20 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.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.21 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.)
- ------------------------------------------------------------------------------------------------------------------------------------
10.22 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.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.23 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.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.24 Amendment to Employment Agreement with Avi Arad dated December 9, 2002. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.25 Amendment to Employment Agreement with Avi Arad dated as of May 1, 2004. (Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.26 Employment Agreement by and between the Company and Alan Fine, dated as of August 13, 2001. (Incorporated
by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.27 Amendment to Employment Agreement with Alan Fine, effective as of August 13, 2003. (Incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.28 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.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.29 Amendment No. 1 to Employment Agreement, dated as of November 21, 2002, by and between the Company and Allen S.
Lipson. (Incorporated by reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.30 Amended and Restated Employment Agreement, dated as of November 21, 2002, by and between the Company and Allen S.
Lipson. (Incorporated by reference to Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.31 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.)*
- ------------------------------------------------------------------------------------------------------------------------------------

32

- ------------------------------------------------------------------------------------------------------------------------------------
10.32 Amendment to Employment Agreement with Isaac Perlmutter dated as of May 1, 2004. (Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.33 Second Amendment to Employment Agreement with Isaac Perlmutter dated as of October 15, 2004. (Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.34 Employment Agreement, dated as of August 1, 2003, by and between the Company and Timothy Rothwell. (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.)*
- ------------------------------------------------------------------------------------------------------------------------------------
10.35 Employment Agreement, dated as of December 11, 2003, by and between the Company and David Maisel. (Incorporated by
reference to Exhibit 10.37 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003.)*
- ------------------------------------------------------------------------------------------------------------------------------------
21 Subsidiaries of the Registrant. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
23 Consent of Independent Auditors. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
24 Power of attorney (included below the signature hereto.)
- ------------------------------------------------------------------------------------------------------------------------------------
31.1 Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed
herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
31.2 Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act. (Furnished herewith.)
- ------------------------------------------------------------------------------------------------------------------------------------

*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/ John N. Turitzin
-----------------------------------------
John N. Turitzin
Executive Vice President

March 8, 2005

33

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints John Turitzin 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/ Isaac Perlmutter Chief Executive Officer and March 8, 2005
- -------------------- Vice Chairman of the Board of Directors
Isaac Perlmutter (principal executive officer)

/s/ Kenneth P. West
- -------------------- Chief Financial Officer March 8, 2005
Kenneth P. West (principal financial officer)

/s/ Mark D. Plotkin
- -------------------- Chief Accounting Officer March 8, 2005
Mark D. Plotkin (principal accounting officer)

/s/ Morton E. Handel
- -------------------- Chairman of the Board of Directors March 8, 2005
Morton E. Handel

/s/ F. Peter Cuneo
- -------------------- Vice Chairman of the Board of Directors March 8, 2005
F. Peter Cuneo

/s/ Avi Arad
- -------------------- Director March 8, 2005
Avi Arad

/s/ Sid Ganis
- -------------------- Director March 8, 2005
Sid Ganis

/s/ Richard Solar
- -------------------- Director March 8, 2005
Richard Solar

/s/ James F. Halpin
- -------------------- Director March 8, 2005
James F. Halpin

34

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

Marvel Enterprises, Inc.
------------------------

Reports of Independent Registered Public Accounting Firm................................................ F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004........................................... F-4
Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004.............. F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December F-6
31, 2002, 2003 and 2004.............................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003, and 2004............. F-7
Notes to Consolidated Financial Statements.............................................................. F-8

Consolidated Financial Statement Schedule
-----------------------------------------
Schedule II-Valuation and Qualifying Accounts........................................................... F-33

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 Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of Marvel
Enterprises, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 2004.
Our audits also include the financial statement schedule listed in the Index at
Item 15(a). These financial statements 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 standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. 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 consolidated financial statements, on January 1,
2002, the Company adopted Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets."

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Marvel
Enterprises, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 25, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New York, New York
February 25, 2005

F-2

Report of Independent Registered Public Accounting Firm

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

We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Marvel Enterprises, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Marvel Enterprises
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that Marvel Enterprises, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Marvel Enterprises, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Marvel Enterprises, Inc. as of December 31, 2004 and 2003, 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, 2004 and our report dated February 25, 2005 expressed an unqualified opinion
thereon.

/s/ Ernst & Young LLP

New York, New York
February 25, 2005

F-3

MARVEL ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, December 31,
2003 2004
---------------------------
(in thousands, except
share data)

ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 32,562 $204,790
Certificates of deposit and commercial paper.................................... 214,457 -
Accounts receivable, net........................................................ 51,820 73,576
Inventories, net ............................................................... 12,975 6,587
Distribution receivable from joint venture, net................................. 2,056 -
Deferred income taxes, net...................................................... 18,197 7,981
Deferred financing costs........................................................ 667 -
Prepaid expenses and other current assets....................................... 2,273 2,734
---------------------------
Total current assets...................................................... 335,007 295,668

Molds, tools and equipment, net................................................... 5,811 5,553
Product and package design costs, net ............................................ 1,433 1,249
Goodwill, net .................................................................... 341,708 341,708
Accounts receivable, non-current portion.......................................... 26,437 37,718
Deferred income taxes, net ...................................................... 28,246 32,583
Deferred financing costs.......................................................... 2,779 -
Other assets...................................................................... 436 335
---------------------------

Total assets.............................................................. $ 741,857 $714,814
===========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 18,455 $ 6,006
Accrued royalties............................................................... 32,936 57,879
Accrued expenses and other current liabilities.................................. 31,442 43,962
Minority interest to be distributed............................................. - 8,428
Unsecured creditors payable .................................................... 2,963 -
Income taxes payable............................................................ 4,705 10,129
Deferred revenue ............................................................. 30,308 27,033
---------------------------
Total current liabilities................................................. 120,809 153,437
Senior notes...................................................................... 150,962 -
Accrued rent...................................................................... 636 165
Deferred revenue, non-current portion............................................. - 14,712
---------------------------
Total liabilities......................................................... 272,407 168,314
---------------------------

Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued........ - -
Common stock, $.01 par value, 250,000,000 shares authorized, 119,706,206 issued and
108,615,206 outstanding in 2003 and 120,442,988 issued and 105,101,788
outstanding in 2004............................................................. 1,198 1,205
Deferred stock compensation....................................................... (4,857) (5,164)
Additional paid-in capital........................................................ 566,908 577,169
Retained earnings (deficit)....................................................... (57,934) 66,943
Accumulated other comprehensive loss.............................................. (2,910) (2,652)
---------------------------
Total stockholders' equity before treasury stock.......................... 502,405 637,501
Treasury stock, 11,091,000 shares in 2003 and 15,341,200 shares in 2004........... (32,955) (91,001)
---------------------------
Total stockholders' equity ............................................... 469,450 546,500
---------------------------

Total liabilities and stockholders' equity ............................... $ 741,857 $714,814
===========================
See Notes to Consolidated Financial Statements.

F-4

MARVEL ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
2002 2003 2004
--------------------------------------
(in thousands, except per share
data)

Net sales............................................................. $ 299,046 $ 347,626 $ 513,468
Cost of sales......................................................... 142,103 79,466 159,589
--------------------------------------
Gross profit ......................................................... 156,943 268,160 353,879
Operating expenses:
Selling, general and administrative.............................. 85,800 108,882 142,839
Depreciation and amortization.................................... 5,433 4,024 3,572
Amortization of goodwill and other intangibles................... 339 314 211
--------------------------------------
Total operating expenses...................................... 91,572 113,220 146,622
Other income, net..................................................... 1,351 1,413 9,039
Equity in net income of joint venture................................. 13,802 10,869 8,117
--------------------------------------
Operating income...................................................... 80,524 167,222 224,413
Interest expense...................................................... 41,997 18,718 20,487
Interest income and other expenses, net.............................. 149 1,868 2,946
--------------------------------------
Income before income tax expense, minority interest and cumulative
effect of change in accounting principle......................... 38,676 150,372 206,872
Income tax (expense) benefit.......................................... (11,902) 1,276 (64,631)
Minority interest in consolidated joint venture....................... - - (17,364)
--------------------------------------
Income before cumulative effect of change in accounting principle..... 26,774 151,648 124,877
Cumulative effect of change in accounting principle, net of income
tax benefit of $3,002............................................ 4,164 - -
--------------------------------------
Net income ........................................................... 22,610 151,648 124,877
Less: preferred stock dividends....................................... 68,132 1,163 --
--------------------------------------
Net (loss) income attributable to common stock........................ $ (45,522) $ 150,485 $ 124,877
======================================
Basic and diluted net (loss) income per share:
Weighted average shares outstanding:
Weighted average shares for basic earnings per share............. 57,771 100,355 107,173
Effect of dilutive stock options................................. 11,836 6,784
Effect of dilutive preferred stock conversion.................... - 1,248 -
--------------------------------------
Weighted average shares for diluted earnings per share................ 57,771 113,439 113,957
Net (loss) income per share:
Basic
Before cumulative effect of accounting change.................... $ (0.72) $ 1.50 $ 1.17
Cumulative effect of accounting change........................... (0.07) - -
--------------------------------------
$ (0.79) $ 1.50 $ 1.17
======================================
Diluted
Before cumulative effect of accounting change.................... $ (0.72) $ 1.34 $ 1.10
Cumulative effect of accounting change........................... (0.07) - -
. --------------------------------------
$ (0.79) $ 1.34 $ 1.10
======================================

See Notes to Consolidated Financial Statements.

F-5

MARVEL ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

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

Balance at December 31, 2001.... 52,151 $ 633 $ - $238,557 $(162,897) $(1,380) $(32,955) $ 41,958
Conversion of preferred stock
to common stock.............. 38,571 386 - 242,941 - - - 243,327
Warrants exercised.............. 443 4 - (4) - - - --
Warrants issued to
stockholder/director. - - - 2,567 - - - 2,567
Preferred dividends............. - - - - (68,132) - - (68,132)
Employee stock options
exercised.................... 545 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.... 91,710 1,028 - 485,763 (208,419) (2,548) (32,955) 242,869

Conversion of preferred stock
to common stock.............. 5,251 53 - 33,890 - - - 33,943
Warrants exercised.............. 7,280 73 - 15,148 - - - 15,221
Preferred dividends............. - - - - (1,163) - - (1,163)
Employee stock options
exercised.................... 4,070 41 - 12,615 - - - 12,656
Tax benefit of stock options
exercised.................... - - - 14,189 - - - 14,189
Restricted stock grants......... 304 3 (5,306) 5,303 - - - --
Amortization of restricted
stock grants................. - - 449 - - - - 449
Net income...................... - - - - 151,648 - - 151,648
Other comprehensive loss........ - - - - - (362) - (362)
-----------
Comprehensive income............ - - - - - - - 151,286
-------------------------------------------------------------------------------------------------

Balance at December 31, 2003.... 108,615 1,198 (4,857) 566,908 (57,934) (2,910) (32,955) 469,450

Employee stock options
exercised.................... 527 5 - 2,096 - - - 2,101
Tax benefit of stock options
exercised.................... - - - 3,608 - - - 3,608
Restricted stock grants......... 215 2 (4,010) 4,008 - - - -
Restricted stock retired........ (5) - 72 (72) - - - -
Treasury stock.................. (4,250) - - - - - (58,046) (58,046)
Amortization of restricted
stock grants................. - - 3,631 - - - - 3,631
Stock compensation expense...... - - - 621 - - - 621
Net income...................... - - - - 124,877 - - 124,877
Other comprehensive income...... - - - - - 258 - 258
-----------
Comprehensive income............ - - - - - - - 125,135
-------------------------------------------------------------------------------------------------

Balance at December 31, 2004.... 105,102 $1,205 $(5,164) $577,169 $66,943 $(2,652) $(91,001) $546,500
=================================================================================================

See Notes to Consolidated Financial Statements.

F-6

MARVEL ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
2002 2003 2004
-----------------------------------
(in thousands)

Net income........................................................... $ 22,610 $151,648 $ 124,877
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................... 5,772 4,338 3,783
Provision for doubtful accounts................................. 3,335 1,123 311
Amortization of deferred financing charges...................... 21,151 667 3,446
Non-cash charge for compensatory stock options and restricted
stock........................................................ - 903 4,252
Tax benefit of stock options exercised.......................... - 14,189 3,608
Gain from sales of fixed assets................................. - (118) (754)
Deferred income taxes........................................... 10,907 (21,382) 7,603
Cumulative effect of change in accounting principle, net of
income tax benefit........................................... 4,164 - -
Minority interest in net income of joint venture (net of
distributions of $9,397)..................................... - - 7,967
Equity in net income of joint venture........................... (13,802) (10,869) (8,117)
Changes in operating assets and liabilities:
Accounts receivable.......................................... (16,501) (18,676) (27,576)
Inventories.................................................. 4,880 3,061 6,388
Distributions received from joint venture.................... 10,031 16,394 3,321
Prepaid expenses and other current assets.................... 6,228 4,427 154
Other assets................................................. 74 (36) (110)
Deferred revenue ............................................ 4,022 867 6,063
Income taxes payable......................................... 167 2,487 5,424
Accounts payable, accrued expenses and other current
liabilities............................................... 11,948 21,928 20,743
-----------------------------------
Net cash provided by operating activities............................ 74,986 170,951 161,383
-----------------------------------

Cash flow (used in) provided by investing activities:
Cash of consolidated joint venture.............................. - - 8,376
Payment of administration expense claims and unsecured creditor
claims....................................................... (4,402) (586) (2,705)
Purchases of molds, tools and equipment......................... (2,068) (1,712) (2,578)
Proceeds from sales of fixed assets............................. - 263 1,210
Expenditures for product and package design costs............... (927) (1,830) (1,008)
(Purchases) sales of certificates of deposit and commercial paper - (214,457) 214,457
Other intangibles and acquisition consideration................. (1) (1,180) -

-----------------------------------
Net cash (used in) provided by investing activities.................. (7,398) (219,502) 217,752
-----------------------------------

Cash flow (used in) provided by financing activities:
Repurchase of senior notes...................................... - - (150,962)
Purchase of treasury stock...................................... - - (58,046)
Repayments of credit facility................................... (37,000) - -
Deferred financing costs........................................ (196) - -
Employee stock options exercised................................ 1,707 12,202 2,101
Proceeds from exercise of stock warrants........................ - 15,221 -
-----------------------------------
Net cash (used in) provided by financing activities.................. (35,489) 27,423 (206,907)
-----------------------------------
Net increase (decrease) in cash and cash equivalents............ 32,099 (21,128) 172,228
Cash and cash equivalents at beginning of year.................. 21,591 53,690 32,562
-----------------------------------
Cash and cash equivalents at end of year........................ $ 53,690 $ 32,562 $204,790
===================================

Supplemental disclosure of cash flow information:
Interest paid .................................................. $29,388 $ 18,116 $ 18,115
Income taxes paid, net of refunds............................... 428 3,363 48,142
Other non-cash transactions:
Preferred stock dividends................................... 68,132 1,163 -
Value of warrants issued in connection with credit
facility................................................. 2,567 - -

See Notes to Consolidated Financial Statements.

F-7

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

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 5,000 characters.

The Company's business is divided into three integrated and
complementary operating segments: its Licensing segment, Publishing segment and
Toy segment. The Company has reevaluated and revised certain revenue and expense
classifications within its internal reporting of segment performance, the same
reporting that is used by executive management to monitor and make decisions on
operating matters. As a result, during the fourth quarter of 2004, the Company
began classifying revenue from its master toy licensee, Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment. Previously, such revenue
and expenses were classified within the Company's Licensing segment. Revenues
from TBW reflect a broader set of efforts on the part of the Company than do
revenues from the Company's other licensees. All TBW toys produced under license
from the Company are created, designed, marketed and sold for TBW by the
Company's Toy segment, under an agency agreement between TBW and the Company.
This is unlike other license arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment involve efforts that are similar in nature to the efforts
associated with the Company's own toys, the Company believes this change will
better aggregate the results derived from Marvel-branded toys developed by
Marvel and more clearly reflect operating results used by management to measure
the performance of the Toy operations. The Company also believes that the
classification of earnings from TBW will better portray trends in Marvel toy
brands designed and marketed by the Company. As a result of this change,
prior-period segment information has been reclassified to conform with the
current year presentation. For financial information about the Company's
operating segments, see Note 15 to the attached financial statements.

The Company and Sony Pictures Entertainment Inc. ("Sony Pictures") have
entered into a joint venture, called Spider-Man Merchandising LP (the "Joint
Venture"), for the purpose of pursuing licensing opportunities relating to
characters based upon movies or television shows featuring Spider-Man and
produced by Sony Pictures. Effective April 2004, the operations of the Joint
Venture, previously recorded under the equity method, have been consolidated in
the Company's accompanying financial statements (see Note 2).

2. Summary of Significant Accounting Policies

Stock Split

On February 24, 2004, the Company approved a 3-for-2 stock split that
was distributed on March 26, 2004 to stockholders of record on March 12, 2004.
All share and per share amounts in the accompanying consolidated financial
statements have been adjusted for this 3-for-2 common share stock split.

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.

F-8

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

2. Summary of Significant Accounting Policies (continued)

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, and forfeiture rates related to
employee stock compensation. 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.

The Joint Venture distributes its cash on a quarterly basis, which is
not freely available for either Sony Pictures or the Company until distributed.
Principally all of the cash balance of the Joint Venture at December 31, 2004 of
$30.9 million, was distributed in February 2005.

Inventories

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

Joint Venture

The Company has entered into the Joint Venture to pursue licensing
opportunities relating to characters based upon movies or television shows
featuring Spider-Man and produced by Sony Pictures.

In May 2004, Sony Pictures and Marvel settled various disputed matters
and, among other matters, altered the distribution of net receipts of the Joint
Venture effective April 1, 2004. As a result of this settlement, effective April
1, 2004, the operations of the Joint Venture have been included in the
accompanying consolidated financial statements. Because the Joint Venture is now
consolidated, the Company's results include the revenues ($67.5 million) and
expenses of the Joint Venture for the period from April 1, 2004 through December
31, 2004. Minority interest due to Sony Pictures of $17.4 million was recorded
to reflect Sony Pictures' interest in the operations of the Joint Venture for
the nine month period ended December 31, 2004. The Company distributes to Sony
Pictures all cash received, related to Sony Pictures' interest, on a quarterly
basis. Accordingly, minority interest to be distributed is included as a current
liability in the accompanying consolidated balance sheet as of December 31,
2004. Prior to April 1, 2004, the Company accounted for its interest in the
activity of the Joint Venture under the equity method.

F-9

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

2. Summary of Significant Accounting Policies (continued)

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. Accumulated depreciation expense related to molds, tools and
equipment was $8.6 million and $9.9 million at December 31, 2003 and 2004,
respectively.

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.
Accumulated depreciation expense related to product and package design costs was
$3.8 million and $4.4 million at December 31, 2003 and 2004, respectively.

Goodwill

Goodwill is stated at cost less accumulated amortization. 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 required 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 performs an annual impairment review at
December 31 of each year.

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.

F-10

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

2. Summary of Significant Accounting Policies (continued)

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.

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.

Research and Development

Research and development costs are charged to operations as incurred.
For the years ended December 31, 2002, 2003 and 2004, research and development
expenses were $2.3 million, $1.5 million and $1.8 million, respectively.

Revenue Recognition

Toy and publishing revenues 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.

Revenue from licensing of characters owned by the Company are recorded in
accordance with guidance provided in Securities and Exchange Commission Staff
Accounting Bulletin No. 104 "Revenue Recognition" (an amendment of 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,
when the fee is fixed or determinable and when 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, when the license period of the
arrangement has begun and the customer can begin its exhibition, when the
arrangement fee is fixed or determinable, and when collection of the arrangement
fee is reasonably assured.

F-11

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

2. Summary of Significant Accounting Policies (continued)

For licenses involving minimum payment obligations to the Company, when
the Company has performed its obligations under the agreement, if any, and
collection is reasonably assured, Staff Accounting Bulletin No. 104 requires
that revenue be recognized prior to the collection of all amounts ultimately
due. The Company's license agreements often include nonrefundable minimum
guaranteed royalties which are payable by the licensee over the life of the
agreement. Generally accepted accounting principles requires that revenue from
licensing be recognized when substantially all Company obligations, if any, are
performed, generally at the inception of the license, and reasonable assurance
of collectibility is determined. For contracts not providing minimum guaranteed
royalties, the Company records license revenue when reported by such licensees
(i.e., based upon royalties earned from the sales of the related character-based
merchandise).

Advertising Costs

Advertising production costs are expensed when the advertisement is
first run. For the years ended December 31, 2002, 2003, and 2004, advertising
expenses were $5.8 million, $5.3 million and $11.4 million, respectively.

Royalties

Minimum guaranteed royalty obligations, 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.

Foreign Currency Translation

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

F-12

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

2. Summary of Significant Accounting Policies (continued)

Stock Based Compensation

In accordance with the provisions of SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"), the Company
has elected to continue to account for its stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations, rather than the fair value method of
accounting for stock options under SFAS 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). 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 (See Note 17):

Years Ended December 31,
2002 2003 2004
--------------------------------------
(in thousands, except per share data)

Net income, as reported..................................................... $ 22,610 $151,648 $124,877
Net (loss) income attributable to common stock, as reported................. (45,522) 150,485 124,877
Net (loss) income per share attributable to common stock -- diluted, as
reported................................................................. (0.79) 1.34 1.10
Stock based employee compensation cost, net of tax, if SFAS 123 was applied. 3,935 6,661 10,300
Pro forma net income........................................................ 18,675 144,987 114,577
Pro forma net (loss) income attributable to common stock.................... (49,457) 143,824 114,577
Pro forma net (loss) income per share attributable to common stock --
diluted ................................................................. (0.85) 1.27 1.01

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. 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 weighted average assumptions for the 2003 grants
are: risk free interest rates ranging from 2.32% to 3.43%; no dividend yield;
expected volatility ranging from 0.59 to 0.78; and expected life of 5 years. The
weighted average assumptions for the 2004 grants are: risk free interest rates
ranging from 2.81% to 3.96%; no dividend yield; expected volatility ranging from
0.48 to 0.58; 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. 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-13

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

2. Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments

The estimated fair value of certain of the Company's financial
instruments, including cash and cash equivalents, certificates of deposit,
commercial paper, 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.

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.

The Company generally requires all toy customers which purchase under
an FOB East Asia basis to secure their orders with an irrevocable letter of
credit or advance funds. The Company's publishing and licensing activities
generally do not require collateral or other security with regard to balances
due from customers. The Company extends credit to its customers in the normal
course of business and performs periodic credit evaluations of its customers,
maintaining allowances for potential credit losses. The Company considers
concentrations of credit risk in establishing the allowance for doubtful
accounts and believes the recorded amount is adequate.

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.

Income (Loss) Per Share

In accordance with SFAS No. 128 "Earnings Per Share", basic income per
share is computed by dividing net income attributable to common stock by the
weighted average number of shares of common stock outstanding during the
periods. The computation of diluted income (loss) per share is similar to the
computation of basic income 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 previously outstanding 8% Preferred Stock
using the if-converted method unless the effect is anti-dilutive. For the year
ended December 31, 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

On December 16, 2004, the Financial Accounting Standards Board issued
SFAS No. 123 (revised 2004), ("SFAS 123(R)"), which is a revision of SFAS 123.
SFAS 123(R) supersedes APB 25, and amends SFAS No. 95, "Statement of Cash
Flows". Generally, the approach in SFAS 123(R) is similar to the approach
described in SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. SFAS 123(R) must be adopted no later than July 1, 2005. Early
adoption will be permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 123(R) on July 1, 2005, using the
modified-prospective method as proscribed in SFAS 123(R).

F-14

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

2. Summary of Significant Accounting Policies (continued)

As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have an impact
on the Company's results of operations, although it will have no impact on its
overall financial position. Had the Company adopted SFAS 123(R) in prior
periods, the impact of that standard would have approximated the impact of SFAS
123 as described in the disclosure of pro forma net income and earnings per
share above. SFAS 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those
amounts will be in the future (because they depend on, among other things, when
employees exercise stock options and the fair value of the Company's common
stock at such dates), the amount of operating cash flows recognized in prior
periods for such excess tax deductions was $0 in 2002 and $14.2 million and $3.6
million in 2003 and 2004, respectively.

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.

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. 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
recorded a one-time, non-cash charge of $4.2 million, (net of income tax of $3.0
million) or $0.07 per share to reduce the carrying value of its goodwill, with
respect to its toy merchandising and distribution reporting unit. 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.

F-15

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

4. Details of Certain Balance Sheet Accounts

December 31,
2003 2004
-----------------------
(in thousands)

Accounts receivable, net, consists of the following:
Toys:
Accounts receivable.............................................. $13,149 $ 7,931
Less allowances for:
Doubtful accounts............................................. (651) (328)
Advertising, markdowns, volume discounts and other............ (3,921) (4,685)
-----------------------
Total toys.................................................. 8,577 2,918
-----------------------
Publishing:
Accounts receivable.............................................. 17,457 19,489
Less allowances for:
Doubtful accounts............................................. (221) (105)
Allowance for returns......................................... (7,924) (6,482)
-----------------------
Total publishing............................................ 9,312 12,902
-----------------------
Licensing:
Accounts receivable.............................................. 38,132 62,174
Less allowances for doubtful accounts........................... (4,201) (4,418)
-----------------------
Total licensing............................................. 33,931 57,756
-----------------------
Total....................................................... $51,820 $73,576
=======================
Inventories, net, consists of the following:
Toys:
Finished goods................................................... $ 6,560 $ 1,259
Component parts, raw materials and work-in-process............... 79 -
-----------------------
Total toys.................................................. 6,639 1,259
-----------------------
Publishing:
Finished goods................................................... 2,053 1,775
Editorial and raw materials...................................... 4,283 3,553
-----------------------
Total publishing............................................ 6,336 5,328
-----------------------
Total....................................................... $12,975 $ 6,587
=======================
Accounts receivable - licensing, non -- current portion are due as
follows:
2005.............................................................. $15,033 $ -
2006.............................................................. 8,900 26,073
2007.............................................................. 5,375 9,910
2008 and thereafter............................................... - 3,700
Discounting....................................................... (2,871) (1,965)
-----------------------
Total....................................................... $26,437 $37,718
=======================

Accrued royalties consists of the following:
Merchandise royalty obligations.................................... $ 1,574 $ 1,299
Freelancer talent.................................................. 2,360 1,382
Movie related...................................................... 29,002 55,198
-----------------------
Total....................................................... $32,936 $57,879
=======================
Accrued expenses and other current liabilities consist of the
following:
Accrued advertising costs.......................................... $ 608 $ 2,444
Inventory purchases................................................ 7,290 3,032
Bonuses............................................................ 4,074 5,545
Accrued expenses -- Fleer sale (principally pension benefits)...... 5,234 6,538
Litigation accruals................................................ 2,719 8,989
Administration expense claims payable.............................. 788 50
Donation........................................................... 2,000 1,333
Interest........................................................... 1,079 -
Other accrued expenses............................................. 7,650 16,031
-----------------------
Total....................................................... $31,442 $43,962
=======================

F-16

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004
5. Debt Financing

On February 25, 1999, the Company completed a $250.0 million offering
of senior notes (the "Senior Notes"). The Senior Notes were due on June 15, 2009
and bore interest at 12% per annum payable semi-annually on June 15th and
December 15th. The Company redeemed all of such notes on June 15, 2004 with
available cash resources, which resulted in a non-recurring charge of $3.2
million associated with the accelerated write-off of previously unamortized
deferred financing costs, and a non-recurring charge of $9.0 million related to
the 6% premium necessitated by the terms of the redemption.

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 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%. In
2002, the Company prepaid $32.4 million of the term loan. In connection with
this early repayment of the term loan, the Company recorded a charge of $11.8
million for the write-off of a proportionate share of unamortized deferred
financing costs associated with the facility.

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. 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 Company's assets other than its intellectual
property; 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 cent per annum. As of December 31, 2004, there were no
borrowings under the HSBC revolver and $0.3 million of letters of credit were
outstanding.

In consideration for the HSBC Credit Facility, the Company issued
warrants to HSBC to purchase up to 1,125,000 shares of the Company's common
stock. These warrants had an exercise price of $2.41 and a life of five years.
The fair value for the warrants was recorded as deferred financing costs. In
December 2002, HSBC exercised 750,000 warrants and received 442,665 shares of
common stock under a Cashless Exercise Ratio provision of the warrants. In
February 2003, HSBC exercised all of its remaining warrants.

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.

F-17

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

5. Debt Financing (continued)

In consideration for the Security Agreement, the Company issued Mr.
Perlmutter 6,904,964 warrants. These warrants had an exercise price of $2.07 and
a life of five years. The aggregate value of the exercisable warrants was $13.0
million and were recorded 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. During 2003, all of such warrants
were exercised.

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

Each share of the 8% cumulative convertible exchangeable preferred
stock (the "8% Preferred Stock") was convertible into 1.559 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 36.8 million shares of its common
stock utilizing a 2.085 exchange rate - or a premium of .526 shares. In
connection with the Exchange Offer, the Company recorded a non-cash charge of
$55.3 million (representing the fair value of the additional common shares (the
premium) 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." On March 31, June 30, September 30 and December 31, 2002, the
Company issued 413,067, 400,538, 407,971 and 64,239 shares, 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 28,207,683 during the year ended December 31, 2002.

On March 30, 2003, the Company converted all remaining outstanding
shares of its 8% Preferred Stock (3.3 million shares) at the stated conversion
rate of 1.559 shares of the Company's common stock per each share of 8%
Preferred Stock. The shares of common stock were issued pursuant to the
exemption from the registration requirements of the Securities Act of 1933 under
Section 3(a)(9) of that act.

Under the terms of the 8% Preferred Stock, the Company was 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 exceeded $7.70 per share; March 18, 2003 marked the 10th
consecutive trading day on which the Company's common stock's closing price met
this criterion. During the three month period ended March 30, 2003, the Company
issued 5.3 million shares of common stock in the conversion. The conversion
increased the trading float and liquidity of the Company's common stock and
extinguished the Company's obligation to redeem any remaining shares of 8%
Preferred Stock for $6.67 per share in cash in 2011.

7. Stock Compensation Plan

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. Under the 1998 Plan, 24.0 million shares, including options
described below, may be the subject of awards, and up to 6.0 million shares may
be the subject of awards granted to any individual during any calendar year.

F-18

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

7. Stock Compensation Plans (continued)

Information with respect to options issued under the 1998 Plan are as
follows:

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

Outstanding at January 1, 2002............... 14,891,312 $ 3.07
Canceled.................................. (426,312) $ 4.17
Exercised................................. (545,748) $ 3.13
Granted................................... 2,563,501 $ 4.90
---------------
Outstanding at December 31, 2002............. 16,482,753 $ 3.33
Canceled.................................. (104,216) $ 6.36
Exercised................................. (4,068,561) $ 3.00
Granted................................... 2,315,438 $ 13.69
---------------
Outstanding at December 31, 2003............. 14,625,414 $ 5.04
Canceled.................................. (281,466) $ 12.43
Exercised................................. (527,202) $ 3.99
Granted................................... 1,333,500 $ 23.29
---------------
Outstanding at December 31, 2004............. 15,150,246 $ 6.55
===============

Stock options outstanding at December 31, 2004 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, 2004 Life -- (Years) Price December 31, 2004 Price
--------------------------------------------------------------------------------------------------------------

$1.59 - $3.25 6,317,144 3.12 $ 2.38 6,302,140 $ 2.38
$3.29 - $6.61 5,452,915 5.50 $ 4.67 4,787,473 $ 4.59
$6.69 - $11.63 1,076,750 8.27 $ 9.21 382,247 $ 9.52
$15.42 - $21.50 1,803,437 5.53 $ 18.74 652,435 $ 19.17
$25.00 - $35.00 500,000 4.34 $ 30.00 500,000 $ 30.00

At December 31, 2002, 2003 and 2004, there were 13,211,499, 11,280,056
and 12,624,295 exercisable options with a weighted average exercise price of
$3.12, $3.82 and $5.40, respectively.

Options granted under the 1998 Plan vest generally in three equal
installments beginning 12 months after the date of grant. At December 31, 2004,
2,819,438 shares were available for future grants of options and rights. At
December 31, 2004, the weighted average remaining contractual life of the
options outstanding is 4.67 years.

F-19

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

7. Stock Compensation Plans (continued)

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 5,925,000 common shares at a
price of $2.41 per share. The options may be exercised at any time. Shares
obtained upon the exercise of 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, 2004, all 5,925,000 options
remain unexercised.

Information with respect to restricted stock issued under the 1998 Plan
are as follows:

Shares
-------------------

Granted during 2003.............................. 304,628
Forfeited during 2003............................ -
-------------------
Outstanding at December 31, 2003.................... 304,628
Granted during 2004.............................. 214,800
Forfeited during 2004............................ (5,289)
-------------------
Outstanding at December 31, 2004.................... 514,139
===================

Restricted stock granted by the Company generally vests between the
second and the third anniversary date of the grant provided that the recipient
is still employed by the Company. The aggregate market value of the restricted
stock at the dates of issuance of $5.3 million in 2003 and $4.0 million in 2004
has been recorded as deferred compensation, a separate component of
stockholders' equity, and is being amortized over the vesting period.

Among the 2003 grants of restricted stock was a grant of 150,000 shares
to the Company's Chairman. Such grant vests over a five-year period - with
one-half of such vesting in March 2005.

As of December 31, 2004, the Company had reserved shares of common
stock for issuance as follows:

Issuance of restricted stock................ 514,139
Exercise of common stock options............ 17,455,588
---------------
Total....................................... 17,969,727
===============

F-20

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

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, 2002, the Company's largest three
customers accounted for approximately 15%, 9% and 4% of total net sales. During
the year ended December 31, 2003, the Company's largest three customers
accounted for approximately 15%, 7% and 4% of total net sales. During the year
ended December 31, 2004, the Company's largest three customers accounted for
approximately 13%, 12% and 4% of total net sales. Additionally, net sales
included license royalty income and toy service fees (classified in the Toy
segment) from Toy Biz Worldwide, Ltd. ("TBW") (see Note 9) during 2002, 2003 and
2004 aggregated $21.8 million, $64.8 million and $15.2 million, respectively.

The Company's wholly-owned Hong Kong subsidiary supervises, with agency
support and other duties from TBW, 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 and
other cash instruments. During the years ended December 31, 2002, 2003, and 2004
international sales were approximately 23%, 24%, and 35%, respectively, of total
net toy sales. During the years ended December 31, 2002, 2003, and 2004 the Hong
Kong operations reported operating income (loss) of approximately ($28,000),
$2,536,000 and $6,336,000 and income before income taxes of approximately
$3,000, $2,536,000 and $6,362,000, respectively. At December 31, 2003 and 2004,
the Company had assets in Hong Kong of approximately $7,191,000 and $5,530,000,
respectively, excluding amounts due from the Company. The Hong Kong subsidiary's
retained earnings were $47,116,000 and $52,365,000 at December 31, 2003 and
2004, respectively. Repatriation of such earnings to the United States would
bear nominal income taxes, if any.

9. Toy Licenses

During 2001, the Company entered into a license agreement with an
unrelated Hong Kong company, 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 5 1/2 years and included the
payment to Marvel of a royalty advance of $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. Such reimbursements have been classified as service fee
income in the accompanying financial statements. Additionally, TBW provided
certain administrative oversight functions on behalf of the Company and received
commissions of $0.6 million in 2002 and 2003, and $0.2 million in 2004. As of
December 31, 2002, the Company had recognized the total $20.0 million advance
into revenue. During the years ended December 31, 2002, 2003 and 2004, the
Company earned royalties from TBW of $10.5 million, $29.6 million, and $9.3
million, respectively, from TBW's sale of Marvel related toy products licensed
to TBW. Additionally, the Company earned service fee income from TBW of $35.2
million in 2003 and $5.9 million in 2004 in exchange for design, marketing and
sales services performed by the Company. Through December 2002, the Company
received a service fee based on TBW's profits, which amounted to $11.3 million
in 2002.

F-21

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

9. Toy Licenses (continued)

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, all of which had been paid as of
December 31, 2003. Through December 31, 2002, 2003 and 2004, the Company has
cumulatively recognized $11.9 million, $14.4 million and $15.0 million,
respectively, 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, 2005.

In addition to toys based on movies and television shows based on
Spider-Man and produced by Sony Pictures, 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

The provision (benefit) for income taxes is summarized as follows:

Years ended December 31,
------------- -- ------------- -- -------------
2002 2003 2004
------------- ------------- -------------
(in thousands)

Current:
Federal....................................... $ - $ 4,121 $ 51,514
State and local............................... 590 1,886 2,397
Foreign....................................... 405 1,095 3,117
------------- ------------- -------------
995 7,102 57,028
------------- ------------- -------------
Deferred:
Federal....................................... 10,907 5,711 12,097
State and local............................... - (14,089) (4,494)
------------- ------------- -------------
10,907 (8,378) 7,603
------------- ------------- -------------

Income tax expense (benefit)........................... $ 11,902 $ (1,276) $ 64,631
============= ============= =============

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

Years ended December 31,
--------------------------------------------
2002 2003 2004
----------- ------------ -----------

Federal income tax provision computed at the statutory rate.... 35.0% 35.0% 35.0%
State and local taxes, net of Federal income tax benefit....... 0.6% 1.0% 1.9%
Joint venture minority interest................................ - - (2.9)%
Valuation allowance............................................ - (38.2)% (3.0)%
Foreign taxes.................................................. 1.0% 0.4% (0.5)%
Purchase accounting............................................ (5.6)% - -
Other.......................................................... (0.2)% 1.0% 0.7%
----------- ------------ -----------
Total provision for income taxes............................... 30.8% (0.8)% 31.2%
=========== ============ ===========

F-22

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

10. Income Taxes (continued)

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,
-------------------------------
2003 2004
------------- -------------
(in thousands)

Deferred tax assets:
Accounts receivable.................................... $ 304 $ 150
Inventory.............................................. 2,079 1,010
Depreciation/ amortization............................. 1,077 1,025
Sales reserves......................................... 2,322 1,541
Employment reserves.................................... 464 2,386
Minimum pension liability.............................. - 1,558
Other reserves......................................... 3,420 11,234
Net operating loss carryforwards....................... 45,018 28,938
Tax credit carryforwards............................... 4,561 -
Other.................................................. 720 493
------------- -------------
Total gross deferred tax assets........................ 59,965 48,335
Less valuation allowance............................... (7,037) (887)
------------- -------------
Net deferred tax assets................................ 52,928 47,448
------------- -------------
Deferred tax liabilities:
Joint venture interest................................. 750 0
Unremitted foreign earnings............................ 0 386
Licensing, net......................................... 5,735 6,498
------------- -------------
Total gross deferred tax liabilities................... 6,485 6,884
------------- -------------
Net deferred tax asset ......................................... $ 46,443 $ 40,564
============= =============

During 2004, the Company completely utilized its Federal net operating
loss carryforwards. The Company retains various state and local net operating
loss carryforwards of $336 million, which will expire in various jurisdictions
in the years 2005 through 2023. As of December 31, 2004, there is a valuation
allowance of $0.9 million against certain capital loss and foreign net operating
loss carryforwards, as there is no assurance that such assets will be realized
in the future. The net change in the valuation allowance during the year ended
December 31, 2004 was a decrease of $6.2 million. Based upon the Company's
positive operating results and forecasts, the valuation allowance against
deferred tax assets for state and local net operating losses was released.

During 2004, the Internal Revenue Service concluded its examination of
the Company for the 1995 through 1998 years. As expected, the effects of the
adjustments were not material to the Company's financial position, results of
operations or cash flows. The Company is also under examination by various state
and local jurisdictions, the results of which are also not expected to be
material to the Company's financial position, results of operations or cash
flows.

F-23

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

11. Quarterly Financial Data (Unaudited)

Summarized quarterly financial information for the years ended December 31, 2003
and 2004 is as follows:

2003 2004

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

Net sales............................ $ 87,377 $ 89,966 $ 84,536 $ 85,747 $122,326 $155,467 $135,183 $100,492
Gross profit......................... 67,093 72,824 64,328 63,915 81,803 92,607 96,865 82,604
Net income........................... 42,221 32,753 63,178 13,496 31,270 29,131 34,352 30,124
Preferred dividend requirement....... 1,163 - - - - - - -
Net income attributable to common
stock............................. 41,058 32,753 63,178 13,496 31,270 29,131 34,352 30,124
Basic net income per common share
before extraordinary gain and
cumulative effect of change in
accounting principle.............. $ 0.45 $ 0.33 $ 0.62 $ 0.13 $ 0.29 $ 0.27 $ 0.32 $ 0.29
Dilutive net income per common share
before extraordinary gain and
cumulative effect of change in
accounting principle.............. $ 0.38 $ 0.28 $ 0.57 $ 0.12 $ 0.27 $ 0.25 $ 0.30 $ 0.27

*Quarterly financial data for the quarter ended September 30, 2003
include a tax benefit of $31.5 million associated with the release of
the valuation allowance for deferred tax assets.

**Quarterly financial data for the quarter ended December 31, 2004
include a charge to operations of $4.0 million for the early
termination of a lease and a tax benefit of $6.2 million associated
with the release of the valuation allowance for deferred tax assets.

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

12. Related Party Transactions

An affiliate of the Company, which is wholly-owned by Mr. Perlmutter,
CEO and 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,
2002, 2003, and 2004, the Company paid fees and commissions to the affiliate
totaling approximately $102,000, $157,000 and $330,000, respectively, relating
to such advertisements.

The Company shares office space and certain general and administrative
costs with the aforementioned affiliate. Rent allocated to this affiliate for
the years ended December 31, 2002, 2003 and 2004 was approximately $83,000,
$87,000 and $85,000, respectively. While certain costs are not allocated among
the entities, the Company believes that it bears its proportionate share of
these costs.

F-24

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

12. Related Party Transactions (continued)

Avi Arad, an officer, member of the Board of Directors, and stockholder
is paid royalties for toys he invented or designed of approximately $684,000,
$867,000 and $850,000 during the years ended December 31, 2002, 2003, and 2004,
respectively. In addition, an entity wholly-owned by Mr. Arad provides
production services in connection with the Company's animated television series.
During the years ended December 31, 2002, 2003 and 2004, the Company paid
production fees to this affiliate of approximately $300,000, $628,000 and
$280,000, respectively. At December 31, 2003 and 2004, the Company had an
obligation to Mr. Arad of approximately $213,000 for unpaid royalties.

The Company paid producer fees in regard to certain television series
to a Company wholly owned by a former officer and employee of approximately
$202,000 and $141,000 during the years ended December 31, 2002 and 2003,
respectively. This arrangement terminated in October, 2003 and there are no
further obligations.

13. Commitments and Contingencies

In June 2000, the Company entered into a lease agreement, as amended on
December 31, 2004, for a corporate office facility. The lease term commenced in
April 2001 and terminates on May 31, 2005. Approximately, $4.4 million of lease
payments are guaranteed by Mr. Perlmutter. Rent expense amounted to $3.2
million, $3.2 million and $7.3 million for the years ended December 31, 2002,
2003 and 2004, respectively. During December 2004, the Company entered into a
lease amendment to effect the early termination of the lease, which generated a
fourth quarter charge to operations of $4.0 million. This charge has been
included in selling, general and administrative expenses in the accompanying
2004 consolidated statement of income. In August 2004, the Company entered into
a lease agreement for new corporate office space. The lease term will commence
on March 1, 2005 and terminate on September 29, 2011.

Minimum rental payments under non-cancelable operating leases as of
December 31, 2004 are as follows:

Year ending December 31:
2005.......................................... $ 2,431
2006.......................................... 1,603
2007.......................................... 1,621
2008.......................................... 1,740
2009.......................................... 1,765
Thereafter............................................. 2,487
-------------
Total.................................................. $ 11,647
=============

The following table sets forth the Company's other contractual
obligations as of December 31, 2004:

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

Royalty Obligations................................ $ 2,750 $ 750 $ 1,000 $ 1,000 $
Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under GAAP.............. 165 165 -- -- --
Expected pension benefit payments.................. 13,441 1,246 2,456 2,530 7,209
----------------------------------------------------------------
Total.............................................. $ 16,356 $ 2,161 $ 3,456 $ 3,530 $ 7,209
================================================================

F-25

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

13. Commitments and Contingencies (continued)

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 $120,000 and $150,000 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 following table sets forth the Company's other commercial
commitments as of December 31, 2004:

Other Commercial Amount of Commitment
Commitments Expiration Per Period
- --------------------------------- ---------------------------------------------------------

Total Less than Over
(Amounts in thousands) 1 Year 1-3 Years 4-5 Years 5 Years
---------------------------------------------------------

Standby Letters of Credit....... $327 $ - $327 $ - $ -

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 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.

Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, in New
York State Supreme Court, County of New York, Mr. Hibbs commenced a putative
class action alleging that the Company breached its own Terms of Sale Agreement
to comic book retailers and resellers, breached its obligation of good faith and
fair dealing, fraudulently induced plaintiff and other members of the purported
class to buy comics and unjustly enriched itself. Mr. Hibbs sought certification
of the putative class and his designation as its representative, compensatory
damages of $8 million on each cause of action and punitive damages in an amount
to be determined at trial. The parties have reached a proposed settlement in
which the retailers and resellers would receive a credit to their account with
the Company's exclusive distributor, depending on their prior purchases of
certain comic book issues. The parties tendered that settlement to the Court for
approval, but it was rejected on technical grounds. The parties have appealed
the rejection of the settlement. It is not known when the Appellate Division
will act on this matter or how long it will take for final approval of the
settlement. In the event the matter does not settle, the Company intends to
defend vigorously against the claims made in this action on their merits.

F-26

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

13. Commitments and Contingencies (continued)

Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an action
in the United States District Court for the Southern District of New York,
alleging claims for breach of his November 1, 1998 lifetime employment
agreement. Mr. Lee claims the right to a 10% profit participation in connection
with all film and television productions that utilize Marvel characters. Marvel
has answered the complaint and denied all of its material allegations. After
both Mr. Lee and Marvel made partial summary judgment motions, the Court held
that Mr. Lee is entitled to a 10% profit participation from Marvel's
exploitation of theatrical and television productions, as well as merchandise
that was both based on motion pictures containing Marvel characters and that was
manufactured and sold directly by Marvel. The Court held that Mr. Lee was not
entitled to any participation in merchandise licensed to third parties.
Discovery on the issues of what profit Marvel made is continuing. Because the
Company has historically received only a small portion of its revenues from the
exploitation of theatrical and television productions, as opposed to merchandise
licensing (based on its characters as they appear in its publications and more
recently in theatrical and television productions), the Company does not expect
this litigation to have a material effect on its future business or financial
condition. No trial date has been set.

Tribune Entertainment Company v. Marvel Enterprises, Inc. On October
30, 2003, Tribune Entertainment Company ("Tribune") filed a complaint against
the Company in New York State Supreme Court, New York County. The complaint
alleges three causes of action: fraud, negligent misrepresentation, and breach
of warranty, all in connection with the license from the Company under which
Tribune produced the Mutant X television series. Prior to release of the Mutant
X television series in 2001, both the Company and Tribune were sued by Twentieth
Century Fox Film Corporation ("Fox"), the licensee of the X-Men properties for
motion pictures, among other rights. That suit was settled between the Company
and Fox in February 2003. According to Tribune's complaint, Tribune settled with
Fox on October 3, 2003. On December 11, 2003, the Company filed its answer,
denying all material allegations of Tribune's complaint and asserting
counterclaims. The action is in the discovery phase and no trial date has been
set.

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 the assets of its
Fleer and Skybox International subsidiaries, the Company retained certain
liabilities related to a defined benefit pension plan for certain of those
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 6.25% for the 2004 expense, 5.75% for the obligation and an expected
rate of return of 7.00%, the accumulated benefit obligation is $20.4 million
($19.4 million as of December 31, 2003) of which $6.2 million ($4.9 million as
of December 31, 2003) is unfunded at December 31, 2004. This amount is recorded
as a component of accumulated other comprehensive loss and is being amortized
over the estimated remaining lives of the participants. Plan expenses for the
years ended December 31, 2002, 2003 and 2004 were not significant.

F-27

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

14. Benefit Plans (continued)

The following tables show disclosure amounts for the 2004 financial
statements as required under SFAS No. 87 as amended by SFAS No. 132. These
figures are based on the population data and actuarial assumptions as of January
1, 2003 and January 1, 2004 and on a September 30 measurement date.

2003 2004
--------------- ----------------

Accumulated Benefit Obligation, End of Year..................... $ 19,361,711 $ 20,353,200
=============== ================

Change in Projected Benefit Obligation
Projected Benefit Obligation, October 1......................... $ 18,749,102 $ 19,361,711
Service cost.................................................... - -
Interest cost................................................... 1,199,488 1,172,399
Plan amendments................................................. - -
Assumption changes.............................................. 1,022,710 1,056,513
Actuarial (gain)/loss........................................... (352,691) 25,234
Benefits paid................................................... (1,256,898) (1,262,657)
--------------- ----------------
Projected benefit obligation, September 30...................... $ 19,361,711 $ 20,353,200
=============== ================

Change in plan assets
Plan assets at fair value, October 1............................ $ 14,198,302 $ 14,416,890
Actual return on plan assets.................................... 1,363,631 652,682
Company contributions........................................... 111,855 317,116
Benefits paid................................................... (1,256,898) (1,262,657)
--------------- ----------------
Plan assets at fair value, September 30......................... $ 14,416,890 $ 14,124,031
=============== ================

Recognition of prepaid (accrued) and total amount recognized as
of December 31
Projected benefit obligation.................................... $(19,361,711) $(20,353,200)
Fair value of assets............................................ 14,416,890 14,124,031
--------------- ----------------
Funded status................................................... (4,944,821) (6,229,169)
Unrecognized net transition (asset) obligation.................. - -
Unrecognized prior service cost................................. (593,529) (539,837)
Unrecognized net (gain) loss.................................... 4,749,139 6,167,192
Contribution adjustment......................................... 27,569 62,057
--------------- ----------------
Prepaid (accrued) pension cost as of December 31 ............... $ (761,642) $ (539,757)
=============== ================

Prepaid benefit cost............................................ $ - $ -
Accrued benefit liability....................................... (4,917,252) (6,167,112)
Intangible asset................................................ - -
Accumulated other comprehensive income.......................... 4,155,610 5,627,355
--------------- ----------------
Total recognized as of December 31.............................. $ (761,642) $ (539,757)
=============== ================

F-28

14. Benefit Plans (continued)

2003 2004

Total cost for plan year
Service cost.................................................... $ - $ -
Interest cost................................................... 1,199,488 1,172,399
Expected return on plan assets.................................. (1,088,715) (1,109,736)
Amortization of:
Unrecognized net (gain) loss................................. - -
Unrecognized prior service cost.............................. (53,692) (53,692)
Unrecognized net asset obligation............................ 93,244 120,748
--------------- -- ----------------
Net periodic pension cost....................................... $ 150,325 $ 129,719
=============== ================

Other comprehensive income...................................... $ 355,551 $ 1,471,745
=============== ================

Measurement date................................................ 9/30/2003 9/30/2004

Assumptions used for annual expense
Discount rate................................................... 6.75% 6.25%
Expected return on plan assets.................................. 8.00% 8.00%
Rate of consumption increase.................................... N/A N/A

Assumptions used for Year-End Disclosure
Discount rate................................................... 6.25% 5.75%
Rate of consumption increase.................................... N/A N/A

-------------------------------------------------------------------------------------------------------

Expected company contribution for 2005.......................... $ 1,063,702

Expected benefit payments:
2005......................................................... 1,246,000
2006......................................................... 1,224,000
2007......................................................... 1,232,000
2008......................................................... 1,250,000
2009......................................................... 1,280,000
2010-2014.................................................... 7,209,000

The amortization of any prior service cost is determined using a
straight-line amortization of the cost over the expected lifetime of inactive
participants in the plan, since the plan has mostly active participants.

F-29

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

15. Segment Information

The Company operates its businesses in three segments: Toy
Merchandising and Distribution, Publishing and Licensing Segments.

Toys Publishing Licensing Corporate Total
------------------------------------------------------------------
(in thousands)

Year ended December 31, 2002
Net sales................................. $176,791 $ 64,501 $ 57,754 $ - $299,046
Gross profit.............................. 70,596 33,060 53,287 - 156,943
Operating income (loss)................... 30,665 19,587 47,575 (17,303) 80,524

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

Total identifiable assets................. 44,147 75,637 397,735 - 517,519

Toys Publishing Licensing Corporate Total
------------------------------------------------------------------
(in thousands)
Year ended December 31, 2003
Net sales................................. $149,922 $ 73,255 $ 124,449 $ - $347,626
Gross profit.............................. 104,758 38,953 124,449 - 268,160
Operating income (loss)................... 77,905 25,442 83,227 (19,352) 167,222

Total capital expenditures................ 3,542 - - - 3,542

Total identifiable assets................. 300,135 69,910 371,812 - 741,857

Toys Publishing Licensing Corporate Total
------------------------------------------------------------------
(in thousands)
Year ended December 31, 2004
Net sales................................. $212,791 $ 85,943 $ 214,734 $ - $513,468
Gross profit.............................. 90,186 48,959 214,734 - 353,879
Operating income (loss)................... 58,144 37,272 152,726 (23,729) 224,413

Total capital expenditures................ 3,431 - 155 - 3,586

Total identifiable assets................. 156,493 64,810 493,511 - 714,814

The Company has reevaluated and revised certain revenue and expense
classifications within its internal reporting of segment performance, the same
reporting that is used by executive management to monitor and make decisions on
operating matters. As a result, during the fourth quarter of 2004, the Company
began classifying revenue from its master toy licensee, Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment. Previously, such revenue
and expenses were classified within the Company's Licensing segment. Revenues
from TBW reflect a broader set of efforts on the part of the Company than do
revenues from the Company's other licensees. All TBW toys produced under license
from the Company are created, designed, marketed and sold for TBW by the
Company's Toy segment, under an agency agreement between TBW and the Company.
This is unlike other license arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment involve efforts that are similar in nature to the efforts
associated with the Company's own toys, the Company believes this change will
better aggregate the results derived from Marvel-branded toys developed by
Marvel and more clearly reflect operating results used by management to measure
the performance of the Toy operations. The Company also believes that the
classification of earnings from TBW will better portray trends in Marvel toy
brands designed and marketed by the Company. As a result of this change,
prior-period segment information has been reclassified as follows:

F-30

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

15. Segment Information (continued)

Year ended December 31, 2002 Year ended December 31, 2003 Year ended December 31, 2004
Previously Reclass As Previously Reclass As Previously Reclass As
Reported Adjustment Adjusted Reported Adjustment Adjusted Reported Adjustment Adjusted
----------- ------------- ---------- ----------- ------------- ---------- ----------- ------------- ----------
(in thousands)

Net Sales
Toys.... $154,983 $21,808 $176,791 $85,167 $64,755 $149,922 $ 197,604 $ 15,187 $212,791
Licensing 79,562 (21,808) 57,754 189,204 (64,755) 124,449 229,921 (15,187) 214,734
Gross Profit
Toys.... 48,788 21,808 70,596 40,003 64,755 104,758 74,999 15,187 90,186
Licensing 75,095 (21,808) 53,287 189,204 (64,755) 124,449 229,921 (15,187) 214,734
Operating
Income
Toys.... 8,857 21,808 30,665 21,723 56,182 77,905 45,655 12,489 58,144
Licensing 69,383 (21,808) 47,575 139,409 (56,182) 83,227 165,215 (12,489) 152,726

Toy Merchandising and Distribution Segment

The Toy 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 division of the Company (which was closed mid-2003) designed,
produced and sold kites in both mass market stores and specialty hobby shops.
Spectra Star's sales amounted to $10.4 million and $1.3 million and for the
years ended December 31, 2003 and 2004, respectively. Its total assets at
December 31, 2004 of $4.2 million consist principally of 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 5,000 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.

Licensing Segment

The Licensing segment relates to the licensing of, or joint venture,
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.

F-31

MARVEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2004

15. Segment Information (continued)

Revenue by Geographic Area*
- ----------------------------------------------------------------------------------------------------
(in thousands)
2002 2003 2004
--------------------------- -------------------------- ---------------------------

U.S. Foreign U.S. Foreign U.S. Foreign
-----------------------------------------------------------------------------------

Licensing..... $ 47,565 $ 10,189 $ 106,264 $ 18,185 $ 173,806 $ 40,928
Publishing.... 53,678 10,823 61,363 11,892 72,779 13,164
Toys.......... 132,434 44,357 118,687 31,235 140,092 72,699
------------- ------------- ------------- ------------- ------------- -------------
Total......... $ 233,677 $ 65,369 $ 286,314 $ 61,312 $ 386,677 $ 126,791
============= ============= ============= ============= ============= =============

* $13,560, $54,080, and $11,446 of the domestic toy revenue and $8,248,
$10,675 and $3,741 of the foreign toy revenues for 2002, 2003 and 2004,
respectively, are attributable to royalties and service fees from toy sales
generated by TBW, which is based in Hong Kong.

F-32

MARVEL ENTERPRISES, INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Balance Charged to Sales Charged to Balance
At Beginning or Costs and Other Deductions at End
Description of Period Expenses Accounts (3) of Period
--------------------------------------------------------------------------------------------------------------------------
(in thousands)
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, volume
discounts and other................ 11,838 15,718 (1) - 15,600 11,956

Year Ended December 31, 2003
Allowances included in Accounts
Receivable, Net:

Doubtful accounts--current............ 7,459 1,124 (2) - 3,510 5,073
Doubtful accounts--non-current........ - - - - -
Advertising, markdowns, volume
discounts and other................ 11,956 12,859 (1) 138 13,108 11,845

Year Ended December 31, 2004
Allowances included in Accounts
Receivable, Net:

Doubtful accounts--current............ 5,073 499 (2) (323) 398 4,851
Doubtful accounts--non-current........ -
Advertising, markdowns, volume
discounts and other................ 11,845 13,355 (1) - 14,033 11,167

(1) Charged to sales.
(2) Charged to costs and expenses.
(3) Allowances utilized and/or paid.

F-33