<PAGE>
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-Q

[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1997

                                      OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 1-10779


                       MARVEL ENTERTAINMENT GROUP, INC.
                            (DEBTOR-IN-POSSESSION)

-------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


DELAWARE                                                        94-3024816

-------------------------------------------------------------------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)



387 PARK AVENUE SOUTH, NEW YORK, NY                                 10016

-------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)


                                 212-696-0808

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


-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last 
 report)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 ______

As of July 31, 1997,  there were  101,809,657  shares of the  registrant's
common stock, par value $.01 per share, outstanding.


<PAGE>




                       MARVEL ENTERTAINMENT GROUP, INC.
                            (DEBTOR-IN-POSSESSION)
            INDEX TO CONTENTS OF THE SECOND QUARTER 1997 FORM 10-Q

<TABLE>
<CAPTION>


                                                                                                               Page
<S>                                                                                                              <C>
Condensed Consolidated Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996-----------------------3



Condensed Consolidated Statements of Operations for the six months and three months
ended June 30, 1997 and 1996 (unaudited)--------------------------------------------------------------------------4



Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997
and 1996 (unaudited)----------------------------------------------------------------------------------------------5



Notes to Condensed Consolidated Financial Statements--------------------------------------------------------------6



Management's Discussion and Analysis of Financial Condition and Results of Operations----------------------------20



Other Information------------------------------------------------------------------------------------------------28



Signatures-------------------------------------------------------------------------------------------------------29
</TABLE>


                                      2

<PAGE>
                               MARVEL ENTERTAINMENT GROUP, INC.
                               (DEBTOR-IN-POSSESSION)
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                (DOLLARS IN MILLIONS)
                                     (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  June 30,   December 31,
                                                                   1997         1996
                                                               -----------   ----------
ASSETS
Current assets:
<S>                                                                 <C>          <C>   
   Cash................................................             $ 25.3       $ 25.1
   Accounts receivable, net............................              185.5        229.1
   Inventories, net....................................               79.7         78.1
   Deferred income taxes...............................                6.2          6.2
   Income tax receivable...............................               10.9         11.8
   Prepaid expenses and other..........................               52.4         49.2
                                                               -----------   ----------

      Total current assets.............................              360.0        399.5                           

Property, plant and equipment, net.....................               79.5         79.5
Goodwill and other intangibles, net....................              304.8        317.6                                          
Deferred charges and other.............................               44.0         47.4                
                                                               -----------   ----------

      Total  Assets....................................             $788.3       $844.0                            
                                                               ===========   ==========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable....................................             $ 85.4       $ 98.5
   Accrued expenses and other..........................              132.5        174.7
   Short term borrowings...............................              140.4         47.3
   Current portion of long-term debt...................              121.6         10.6
   Liabilities subject to settlement under reorganization             28.7         29.7
                                                               -----------   ----------

     Total current liabilities.........................              508.6        360.8

Long-term debt.........................................               14.8        145.0
Other long-term liabilities............................               20.3         20.4
Liabilities subject to settlement under reorganization.              473.5        473.5
                                                               -----------   ----------

     Total Liabilities.................................            1,017.2        999.7                                   

Minority interest in Toy Biz...........................               97.2        100.6           
                                                               -----------   ----------

Stockholders' deficit:
   Common Stock........................................                1.0          1.0
   Additional paid-in capital..........................               93.1         93.1                            
   Accumulated deficit ................................             (420.0)      (350.3)
   Cumulative translation adjustment ..................               (0.2)        (0.1)
                                                               -----------   ----------

     Total Stockholders' Deficit.......................             (326.1)      (256.3)
                                                               -----------   ----------

     Total Liabilities and Stockholders' Deficit.......             $788.3       $844.0
                                                               ===========   ==========

</TABLE>

   The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.

                                       3
<PAGE>
                        MARVEL ENTERTAINMENT GROUP, INC.
                             (DEBTOR-IN-POSSESSION)
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  For the             For the
                                                             Three Months Ended   Six Months Ended
                                                                  June 30,            June 30,
                                                             -------------------  ------------------
                                                               1997      1996      1997      1996
                                                             --------- ---------  --------  --------
<S>                                                         <C>        <C>         <C>      <C>

Net revenues...........................................        $ 129.6  $  182.2  $  286.3  $  371.8

Cost of sales..........................................            96.4    115.4     200.9     229.3

Selling, general & administrative expenses.............            51.5     55.6     100.0     107.9

Depreciation and amortization..........................             7.7      4.9      12.5       9.3

Amortization of goodwill, intangibles and deferred charges          4.1      5.5       8.4      11.0

Interest expense, net (contractual interest for the three 
and six months ended June 30, 1997 was $16.9 and $32.5 
respectively)..........................................            13.2     13.8      28.8      27.5

Foreign exchange loss/(gain), net......................            (0.8)     0.9      (1.5)      1.5

Equity in net (loss) income of unconsolidated subsidiaries
and other, net.........................................            (5.3)     0.4      (5.2)      0.5 
                                                              --------- ---------  --------  --------

Loss before reorganization items, benefit for income taxes,
  and minority interest................................           (47.8)   (13.5)    (68.0)    (14.2)

Reorganization items...................................             2.6       -        6.0        -
                                                             --------- ---------  --------  --------

Loss before benefit for income taxes and
  minority interest....................................           (50.4)    (13.5)    (74.0)    (14.2)          

Benefit for income taxes...............................            (4.6)     (5.4)     (0.8)     (3.7)   
                                                              --------- ---------  --------  --------

Loss before minority interest..........................           (45.8)     (8.1)    (73.2)    (10.5)

Minority interest in (loss) earnings of Toy Biz........            (3.9)      2.9      (3.5)      4.9
                                                              --------- ---------  --------  --------

Net loss...............................................        $  (41.9) $  (11.0)  $ (69.7)  $ (15.4)
                                                              ========= =========  ========  ========

Loss per share.........................................        $   (.41) $   (.11)  $  (.68)  $  (.15)
                                                              ========= =========  ========  ========

Common shares outstanding (in millions)................           101.8     101.8     101.8     101.8
                                                              ========= =========  ========  ========

</TABLE>


 The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.

                                       4



<PAGE>
                               MARVEL ENTERTAINMENT GROUP, INC.
                                    (DEBTOR-IN-POSSESSION)
                        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     (DOLLARS IN MILLIONS)
                                          (UNAUDITED)
<TABLE>
<CAPTION>
                                                                             For the
                                                                        Six Months Ended
                                                                            June 30,
                                                                     ------------------------
                                                                       1997          1996
                                                                     ----------    ----------
<S>                                                                     <C>           <C>     
   Cash flows from operating activities:
   Net loss...................................................        $   (69.7)    $   (15.4)
                                                                     ----------    ----------
    Adjustments to reconcile net loss to net cash 
    used in operating activities:

      Depreciation and amortization ..........................             20.9          20.3                                
      Provision for deferred income taxes ....................              -             1.6
      Undistributed loss (earnings) of unconsolidated entities 
     (primarily restaurants)..................................              5.2          (0.5)
      Minority interest in earnings of Toy Biz................             (3.5)          4.9
      Changes in assets and liabilities:
        Decrease in accounts receivable, net..................             43.3          24.6                      
        Increase in inventories...............................             (1.3)        (12.3)
        Increase in other assets..............................             (8.4)         (3.7)    
        Decrease in accounts payable .........................             (7.5)        (14.6)     
        Decrease in accrued expenses and other................            (41.0)        (45.3)
                                                                     ----------    ----------
   Total adjustments..........................................              7.7         (25.0)
                                                                     ----------    ----------

        Net cash used in operating activities.................            (62.0)        (40.4)          
                                                                     ----------    ----------

   Cash flows from investing activities:
     Capital expenditures (including product development and 
     package design costs)....................................            (14.3)        (21.3)
     Other Acquisition, net of cash and cash equivalents acquired          (3.9)           -
     Other investing activities...............................             (7.1)         (0.2)
                                                                     ----------    ----------

        Net cash used in investing activities.................            (25.3)        (21.5)
                                                                     ----------    ----------

   Cash flows from financing activities:
     Net (repayments) borrowings under Credit Agreements......             (5.1)         29.9
     Net borrowings under Toy Biz credit facility.............             12.0            -
     Net borrowings under DIP Loan............................             84.2            - 
     Net (repayments) borrowings under other debt.............             (1.7)          0.7
     Proceeds from exercise of stock options..................               -            0.5
     Other financing activities...............................              0.1          (1.0)
                                                                      ----------    ----------
        Net cash provided by financing activities.............             89.5          30.1                       
                                                                     ----------    ----------

   Effect of exchange rate changes on cash ...................             (2.0)          0.9
                                                                     ----------    ----------

   Net increase (decrease) in cash ...........................              0.2         (30.9)

   Cash, at beginning of period...............................             25.1          53.6
                                                                     ----------    ----------
   Cash, at end of period.....................................            $25.3        $ 22.7    
                                                                     ==========    ==========

   Supplemental disclosures of cash flow information:
        Interest paid during the period.......................            $32.5        $ 29.9
        Income taxes paid, net of refunds, during the period..            $ 0.8         $ 7.9
</TABLE>


   The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.

                                       5


<PAGE>

                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

1.       BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION

         The accompanying unaudited condensed consolidated financial
statements include the accounts of Marvel Entertainment Group, Inc. ("Marvel")
and its subsidiaries (collectively, the "Company"). In the opinion of
management, all adjustments and intercompany eliminations necessary for a fair
presentation of the results of operations, financial position and cash flows
have been made and were of a normal recurring nature. The Company's operations
consist of (i) the publication and sale of comic books and children's
magazines, (ii) the manufacture and distribution of sports and entertainment
trading cards and children's activity sticker collections, (iii) consumer
products, media and advertising-promotion licensing of the various characters
owned by the Company, (iv) the design, marketing and distribution of toys and
(v) the manufacture and distribution of adhesive paper and confectionery
products. These interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related
notes thereto contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996. Certain prior year amounts have been
reclassified to conform with the current year presentation.

         The Company continues to consolidate the results of operations and
financial position of Toy Biz, Inc. ("Toy Biz") in its financial statements
for the period ended June 30, 1997. The Company's controlling interest in Toy
Biz, however, is the subject of a dispute described more fully in Management's
Discussion and Analysis of Financial Condition and Results of Operations. In 
addition, the Company, Toy Biz and various other interested parties have 
reached an agreement in principle, by which Toy Biz will become a wholly-owned 
subsidiary of the Company as reorganized (see Note 5).

2.       CHAPTER 11 REORGANIZATION

         Marvel Holdings, Inc. ("Holdings"), is the owner of 50.03% of the
issued and outstanding shares of common stock of Marvel. Holdings is a
wholly-owned subsidiary of Marvel (Parent) Holdings, Inc. ("Marvel Parent")
which, in turn is a wholly-owned subsidiary of Marvel III Holdings, Inc.
("Marvel III", and collectively with Holdings and Marvel Parent, the "Holding
Companies"). In 1993, Holdings issued, pursuant to an indenture (the "Holdings
Indenture"), approximately $517.4 principal amount at maturity of Senior
Secured Discount Notes due in 1998 (the "Holdings Notes") secured by, among
other things, 48 million shares (as adjusted to reflect a subsequent stock
split) of Marvel common stock. In 1993, Marvel Parent issued, pursuant to an
indenture (the "Parent Indenture"), approximately $251.7 principal amount at
maturity of Senior Secured Discount Notes due 1998 (the "Parent Notes")
secured by, among other things, 100% of the shares of common stock of Holdings
(the "Holdings Stock") and 20 million shares (as adjusted to reflect a
subsequent stock split) of Marvel common stock. In 1994, Marvel III issued,
pursuant to an indenture (the "Marvel III Indenture"), $125.0 principal amount
of 9-1/8% Senior Secured Notes due 1998 (the "Marvel III Notes") secured by,
among other things, 100% of the shares of common stock of Marvel Parent (the
"Parent Stock") and 9,302,326 shares of Marvel common stock.

         On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries, Fleer Corp. ("Fleer"), SkyBox International, Inc.
("SkyBox"), Marvel Characters, Inc., Heroes World Distribution, Inc. ("Heroes
World"), The Asher Candy Company, Malibu Comics Entertainment, Inc.
("Malibu"), Frank H. Fleer Corp. and Marvel Direct Marketing Inc. (along with
Marvel, the "Debtor Companies") filed petitions for relief and a plan of
reorganization under Chapter 11, Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). Panini S.p.A. ("Panini"), Marvel Restaurant
Venture Corp. ("Marvel Restaurants") (a general partner in the joint venture
developing the Marvel Mania restaurants) and Toy Biz, all of which are active,
as well as certain other subsidiaries did not file petitions under the
Bankruptcy Code.

          On December 27, 1996, Marvel filed a Plan of Reorganization (as
amended, the "Initial Plan") which contemplated that pursuant to the Stock
Purchase Agreement dated December 26, 1996, between Andrews Group Incorporated
("Andrews") and Marvel, Andrews, or an affiliate thereof, would acquire from
Marvel, a number of shares of common stock (or its equivalent) that would
represent 80.1% of the shares of reorganized Marvel after giving effect to
such acquisition, in consideration for $365 in cash or, at the option of
Andrews, shares of class A

                                      6
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


common stock, par value $.01 per share of Toy Biz (the "Class A common stock")
or a combination of the foregoing (the "Andrews Investment"). The Initial Plan
contemplated that in connection with the Andrews Investment, the Company would
acquire the Class A common stock not owned by Marvel, Andrews or their
affiliates pursuant to a Merger Agreement between Andrews and Toy Biz and a
Stock Purchase Agreement with the two other principal stockholders of Toy Biz.
The Initial Plan also contemplated a new $160 credit facility for Toy Biz to
be used for working capital purposes of the Company, including Toy Biz, and to
fund the Company's strategic initiatives. As of June 30, 1997, the Company
owned 7,394,000 shares of class B common stock of Toy Biz (the "Class B common
stock"), representing 26.6% of the equity of Toy Biz, and 78.4% of the voting
power relating to Toy Biz. The Initial Plan has since been withdrawn as
described below.

         As part of the first day orders, the Debtor Companies received
approval from the Bankruptcy Court to pay on time and in full undisputed
pre-petition obligations including salaries, wages and benefits to all of its
employees, trade creditors and independent contractors and to continue funding
its strategic initiatives. On January 24, 1997 the Bankruptcy Court approved a
$100 debtor-in-possession financing facility (the "DIP Loan"), which is
provided by a syndicate of lenders, including The Chase Manhattan Bank, as
agent bank. As of June 30, 1997, the current outstanding debt under this
facility was $94.2. The DIP Loan matured on June 30, 1997 and no repayment has
occurred. The DIP Loan is subject to covenants and events of default including
a change of control of Marvel (as defined therein). See Note 4.

         On December 27, 1996, the Holding Companies filed voluntary petitions
for relief under the Bankruptcy Code with the Bankruptcy Court. The chapter 11
cases commenced by the Holding Companies have not been procedurally
consolidated and are not jointly administered with the Debtor Companies'
chapter 11 cases (the "Holding Cases").

         On January 9, 1997, the United States Trustee appointed an Official
Bondholders Committee (the "Bondholders Committee") to represent the interests
of all holders (collectively the "Noteholders") of the Holdings Notes, the
Parent Notes and the Marvel III Notes (collectively, the "Notes"). The members
of the Bondholders Committee, is currently composed of: High River Limited
Partnership ("High River"), Westgate International, L.P. ("Westgate"), Schultz
Investments, WHERCO, Inc., M3, LLC and United Equities Commodities Company.

         The commencement of the Chapter 11 cases by the Holding Companies was
an event of default under each of the Holdings Indenture, the Parent
Indenture, and the Marvel III Indenture (collectively, the "Indentures").
After its formation on January 13, 1997, the Bondholders Committee filed a
motion (the "Lift Stay Motion") with the Bankruptcy Court seeking an order
lifting the automatic stay in the Holding Cases and, thus, permitting the
trustee under the Indentures (the "Trustee") to vote and to foreclose upon
shares of stock pledged to secure repayment of the Notes, including (i) 100%
of the Holdings Stock, (ii) 100% of the Parent Stock and (iii) approximately
78.8% of the Marvel common stock (collectively, the "Pledged Stock"). On
January 13, 1997 The Bank of New York, then trustee under the Indentures,
joined in the Lift Stay Motion, and on January 30, 1997, LaSalle National Bank
(after its appointment as successor trustee) also joined the Lift Stay Motion.
On February 26, 1997, the Bankruptcy Court entered an order granting the Lift
Stay Motion and permitting the Bondholders Committee and the Trustee, on
behalf of the Noteholders, to vote and to foreclose upon the Pledged Stock
(the "Lift Stay Order"). On February 27, 1997, the Company and the Holding
Companies filed a notice of appeal with respect to such order.

         On February 12, 1997, the United States Trustee appointed a committee
of equity security holders of the Debtor Companies under section 1102(a)(1) of
the Bankruptcy Code (the "Equity Committee"). The Equity Committee presently
consists of: Barclay's Global Investors, Marty Solomon, Robert A. Della
Camera, Peter E. Kelly, Jr., Gladys V. Veidemanis and Ronald Cantor.

         On March 7, 1997, Andrews exercised its right to terminate the Stock
Purchase Agreement with the Company. On the same date, Andrews informed Toy
Biz and the two principal stockholders of Toy Biz (other than the Company)
that, as a result of the termination of the Andrews Investment, a condition to
closing under the 

                                      7
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


Merger Agreement with Toy Biz and the Stock Purchase Agreement would not be
satisfied, that Andrews Group did not intend to waive the satisfaction of such
condition and therefore the transaction contemplated by such agreements would
not be consummated. As a consequence of the termination of the Stock Purchase
Agreement, the Initial Plan was withdrawn.

         On March 19, 1997, the Bondholders Committee notified the Company
that on March 25, 1997 it would cause the Trustee to vote the Pledged Stock to
replace the Board of Directors of Marvel. On March 24, 1997, at the request of
Marvel and its bank lenders (the "Bank Lenders"), the Bankruptcy Court issued
a restraining order (the "Stay Order") enjoining the Bondholders Committee and
the Trustee from voting the Pledged Stock or otherwise replacing the Board of
Directors of Marvel without first seeking and obtaining relief from the
automatic stay imposed under the Bankruptcy Code in the Chapter 11 cases of
the Debtor Companies (the "Marvel Cases"). The Stay Order, however, did not
prevent the holders of Parent Notes from exercising voting power over Holdings
Stock for the purpose of removing and replacing the Board of Directors of
Holdings.

         On April 24, 1997, the Trustee, at the direction of the holder of a
majority of the Parent Notes, removed the members of the Board of Directors
of Holdings and appointed Carl C. Icahn, Vincent J. Intrieri and Robert J.
Mitchell to the Holdings Board. As a result, Marvel is no longer consolidated
for federal income tax purposes with Mafco Holdings, Inc. ("Mafco"). As a
result of such tax deconsolidation, the Company will retain an allocated
portion, if any, of net operating loss carryforwards ("NOLs") of the Mafco
affiliated group. Such allocation is not yet determinable. Such NOLs will be
limited under federal income tax laws since a change of control (as defined in
the internal revenue code) of the Company has occurred. Further limitation
could result if a plan of reorganization is consummated.

         Between March 24, 1997 and June 20, 1997 Marvel and the Bank Lenders
requested action by the Bankruptcy Court and the United States District Court
for the District of Delaware (the "District Court") seeking, among other
things, to prevent the Noteholders and Holdings from exercising voting
authority with respect to the shares of Marvel common stock owned by Holdings
for the purpose of removing the existing Board of Marvel and replacing it with
the New Board (as defined below). At the same time, the Bondholders Committee
and Trustee also requested action by the Bankruptcy Court and the District
Court seeking to permit the Noteholders and/or Holdings to exercise voting
authority over such shares for such purpose. Such litigation culminated in the
issuance of an order by the District Court vacating the Bankruptcy Court's
Stay Order effective as of 5:00 p.m. (New York time) on June 20, 1997. The
effect of such order was to permit Holdings, as majority stockholder of
Marvel, to vote such stock to remove the existing Board of Marvel and replace
it with a New Board (the "New Board") which is comprised of the following
directors: Carl C. Icahn, Harold First, Charles K. MacDonald, Glen Adams, J.
Winston Fowlkes, III, Robert J. Mitchell, Jouko T. Tamminen, Vincent J.
Intrieri, and Michael J. Koblitz. Additionally, the New Board by written
consent amended and modified Marvel's By-laws to provide that Marvel's Board
of Directors shall be composed of nine persons or such other number of persons
as may thereafter be fixed by Marvel's Board of Directors. As a result of the
replacement of the existing board with the New Board, Toy Biz has taken the
position that a change in control occurred under the Stockholders Agreement
and that the Company's shares of Toy Biz Class B common stock automatically
converted to Class A common stock, reducing the Company's voting control of
Toy Biz from 78.4% to 26.6%. The Company disputes Toy Biz's position and
maintains that it continues to own Class B common stock of Toy Biz. The
Company is currently in litigation with Toy Biz with respect to this issue.

         On July 10, 1997 it was announced that Marvel, High River, Westgate,
Toy Biz, Isaac Permutter, Avi Arad and The Chase Manhattan Bank had reached an
agreement in principle on certain key economic terms relating to the Marvel
Cases and the Holding Cases. Consummation of the agreement in principle
remains subject to: (1) negotiation and execution of definitive documentation
regarding the agreement; (2) approvals of the Boards of Directors of Marvel
and Toy Biz; (3) approval by holders of at least 67% in amount and 51% in
number of the secured lender claims (other than the secured lender claims
against Panini); and (4) approval of the Bankruptcy Court, none of which is
assured. The agreement stipulated that definitive agreements would be reached
by July 24, 1997. This date has been extended a number of times, with the 
latest being August 20, 1997. There exist a number of material issues which
are still being negotiated among the parties. There can be no assurance that
a final definitive agreement can be reached.

         The agreement in principle provides that, pursuant to a plan of
reorganization (the "Plan") to be proposed by the Company, the Holding
Companies, Toy Biz, High River and Westgate, Marvel and Toy Biz would be
combined (the "Toy Biz Merger") in a transaction in which the stockholders of
Toy Biz (other than the Company) would receive, in exchange for their Toy Biz
shares, 49% of the outstanding shares of common stock of the Company, as
reorganized ("Reorganized Marvel").

                                      8
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


         Additionally, pursuant to the Plan, the currently outstanding shares
of Marvel common stock would be canceled and Marvel's equity holders
(including the Noteholders) would be offered rights (the "Rights Offering") to
purchase on a pro rata basis: (1) new shares equal to 51% of outstanding
common stock of Reorganized Marvel for an aggregate price of $170.0 and (2)
$225.0 of new debt securities of Reorganized Marvel. High River and Westgate
would appoint a majority of the board of directors of Reorganized Marvel. The
proceeds of the rights offering would be used to retire all of the bank claims
acquired by High River and Westgate as described below.

         The agreement in principle further contemplates that High River and
Westgate would purchase all of the prepetition and postpetiton claims and
liens of the secured lenders of the Company of approximately $700.8 at June
30, 1997, except for $120.0 of indebtedness of Panini and $80.0 to $95.0 of
indebtedness of the Company's Fleer/SkyBox businesses (which indebtedness
would no longer be indebtedness of the Company), in exchange for: (a) $395.0
in cash; and (b) five year warrants issued by the Company to acquire ten
percent (10%) of Reorganized Marvel, which warrants would have an exercise
price based upon a net equity value of $525.0 with no more than $225.0 in term
indebtedness for borrowed money (exclusive of indebtedness for working
capital). Under this arrangement, Fleer/SkyBox and Panini would be auctioned
for sale for the benefit of the Company's secured lenders. Pending such
auction, Fleer/SkyBox and Panini would be operated for the account of such
secured lenders and all expenses of such operation would be the responsibility
of the Company's secured lenders. The secured lenders would receive 100% of
the common stock of Panini and Fleer/SkyBox at the earlier of (i) such time
as they request it in writing, or (ii) the consummation of a plan of
reorganization for the Company and the Holding Companies. The Company would
receive a $200.0 million to $215.0 million credit against indebtedness held by
the Company's secured lenders (in exchange of net assets including goodwill and
other intangibles of approximately $268.7 at June 30, 1997 transferred to the
secured lenders) at such time as an order of the Bankruptcy Court in form and
substance reasonably acceptable to High River, Westgate, and the secured
lenders, approving the acquisition and settlements of the secured lender
claims (other than the specified claims against Panini and Fleer/SkyBox)
becomes a final order. In the absence of the transactions contemplated by
the agreement in principle, the Company has made no determination whether to
continue operating or to otherwise dispose of Panini and Fleer/Skybox.

         The proposed global settlement contemplated that an auction for
Panini and Fleer/SkyBox is to be conducted. At such time, as any sale of the
assets of Fleer/SkyBox and Panini occurs, Fleer/SkyBox and Panini would be
deconsolidated. Based on the operating results of Fleer/SkyBox and Panini, the
status of the global settlement and the auction process, the Company continues
to evaluate whether an impairment of goodwill and other intangibles has taken
place. Further, under the terms of the proposed global settlement, the Company
will realize a significant forgiveness of debt.

     The Company has entered into a number of animation and movie contracts
for various highly recognizable  characters of its universe. The Company
believes that such contracts accrue significant benefit to Toy Biz. This
benefit is derived from Marvel's grant of a royalty free license to Toy Biz
for the use of all its characters in the sale of toys and other toy related
product offerings. Given the Company's financial condition, the Company can no
longer expend funds for animation and/or movies from which Toy Biz receives
more direct benefit than Marvel. The Company believes that the proposed
agreement in principle, if consummated, would allow the consolidated Company
to continue to enjoy the benefits of the exploitation of its characters,
without any financial disadvantage between Marvel and Toy Biz.

     In the event that a global settlement is not achieved, the Company will be
forced to evaluate various alternatives to protect its long term interests.
Such alternatives may include: (i) attempting to revoke or reject through its
chapter 11 proceedings the royalty free license to Toy Biz; or (ii) exercising
all its rights under the license agreement. Additionally, if a global
settlement is not reached, Marvel may be forced to restructure certain movie
contracts which have a negative effect to Marvel, in that Marvel must pay a
portion of all toy revenues to the movie developers, even through Marvel
receives no cash benefit from toy revenues due to the fact that all these
revenues accrue to Toy Biz. Further, if there is no global settlement and
these movie contracts cannot be restructured, Marvel may suffer severe
financial consequences in the future. Marvel is continuing to focus its
efforts on the final negotiation and execution of a global settlement, as
well as continuing to develop animation and theatrical releases for its
long-term success.
        
     A significant part of the Company's value is tied to its universe of
characters. The Company has been in bankruptcy since December 27, 1996 and
as such it has incurred significant cash/operating losses. The Company
believes that while in bankruptcy, it is significantly inhibited from the 
exploitation of its character base. Therefore, if it continues in bankruptcy, 
the Company is unsure as to the potential of a long-term negative effect of 
such proceedings on the value of its character base. The Company's ability to 
continue to operate in this state, having incurred $94.2 in additional 
indebtedness since its petition date, raises serious doubt concerning the 
value of its assets to creditors, lenders and shareholders, and its ability 
to rejuvenate itself through the successful exploitation of its character 
base. The Company is hopeful that a global settlement can be executed however,
there still exists a number of unresolved issues between all the parties, 
which the Company is working to overcome. The Company believes that the 
global settlement, if executed in the near term, will preserve the value of 
its character base and thereby contribute to the long-term viability of the 
Company. There can be no assurance that the Plan, or any other plan of 
reorganization will be submitted or confirmed under the Bankruptcy Code. If 
the Company is unable to obtain confirmation of a plan of reorganization, its 
creditors, lenders or equity security holders may seek other alternatives for 
the Company. 

         On June 30, 1997, the DIP Loan matured and no repayment has occurred.
The DIP lenders agreed to forbear from taking any action through August 14,
1997. Such forbearance is continuing on a daily basis while the Company 
negotiates a replacement DIP loan. With a full reservation of all rights, the
prepetition secured lenders have agreed not to object to the Debtors'
continued use of the cash collateral through August 20, 1997 on the same terms
and conditions and with the same protections as set forth in the current
financing and cash collateral order approved by the Bankruptcy Court.

         The accompanying condensed consolidated financial statements have
been prepared on a going concern basis, which assumes continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. However, as a result of the Marvel Cases and
circumstances relating thereto, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. These conditions raise
substantial doubt as to the Company's ability to continue as a going concern.
As of June 30, 1997, the Company's carrying value of goodwill for its trading
cards and stickers businesses was approximately $106.1 and $103.0,
respectively. The sale of the Company or parts thereof may necessitate a
material write down of assets, including goodwill associated with the
Company's businesses.

                                      9
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

         As part of the Chapter 11 process, the Debtor Companies have received
a significant number of proofs of claims. The Company is currently in the
process of reviewing these claims and believe that a majority of these claims
are without merit and/or are highly disputed. Although the Company believes
that reserves as of June 30, 1997 are adequate to cover the ultimate liability
under these claims, there can be no assurances that these claims will not be
settled for amounts in excess of these reserves.

         Financial accounting and reporting during a Chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under Bankruptcy Code" ("SOP 90-7"). Accordingly, certain
pre-petition obligations, which may be subject to settlement, have been
classified as obligations subject to Chapter 11 reorganization proceedings and
include the following estimated amounts:

<TABLE>
<CAPTION>

                                                                               June 30,           December 31,
                                                                                 1997                 1996
                                                                            ---------------      ---------------
<S>                                                                           <C>                  <C>       
          Total accrued expenses----------------------------------------      $     13.7           $     14.7
          Chase Revolving Line of Credit--------------------------------            15.0                 15.0
          Total current liabilities-------------------------------------     -------------        -------------
                                                                              $     28.7           $     29.7
                                                                             =============        =============

          Debt:
           U.S. Term Loan Agreement-------------------------------------      $    350.0           $    350.0
           Amended and Restated Credit Agreement------------------------           120.0                120.0
           Chase Revolving Line of Credit-------------------------------            15.0                 15.0
                                                                             -------------        -------------
             Total debt-------------------------------------------------           485.0                485.0
           Less current maturities                                                 (15.0)               (15.0)
           Other long-term liabilities----------------------------------             3.5                  3.5
                                                                             -------------        -------------
           Total long-term liabilities----------------------------------      $    473.5           $    473.5
                                                                             =============        =============
</TABLE>





                                      10

<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


3.       DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>

ACCOUNTS RECEIVABLE, NET:
                                                                               June 30,           December 31,
                                                                                 1997                 1996
                                                                            ---------------      ----------------
<S>                                                                           <C>                  <C>        
          Accounts receivable-------------------------------------------      $     228.2          $     275.3
          Less:  Allowances---------------------------------------------            (42.7)               (46.2)
                                                                             -------------        -------------
                                                                              $     185.5          $     229.1
                                                                             =============        =============

INVENTORIES, NET:

          Finished goods------------------------------------------------      $      64.2          $      69.4
          Work in process-----------------------------------------------             13.0                 16.3
          Raw materials-------------------------------------------------             21.1                 22.0
          Less: Reserve for obsolescence--------------------------------            (18.6)               (29.6)
                                                                             ------------         ------------
                                                                              $      79.7          $      78.1
                                                                             ============         ============

GOODWILL AND OTHER INTANGIBLES, NET:

          Goodwill and other intangibles--------------------------------      $     368.4          $     374.3
          Less: Accumulated amortization--------------------------------            (63.6)               (56.7)
                                                                             ------------         ------------
                                                                              $     304.8          $     317.6
                                                                             ============         ============

ACCRUED EXPENSES AND OTHER:


          Royalties and incentives--------------------------------------      $      21.6          $      23.0
          Reserve for returns-------------------------------------------             44.8                 51.2
          Income taxes payable------------------------------------------              7.6                 10.9
          Other---------------------------------------------------------             72.2                104.3
          Less amounts reclassified to liabilities subject to 
          settlement under reorganization (See Note 2)------------------            (13.7)               (14.7)
                                                                             ------------         ------------
                                                                              $     132.5          $     174.7
                                                                             ------------         ------------
</TABLE>




                                      11
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>

4.       AMOUNTS PAYABLE TO BANKS

Short term borrowings consists of the following:


                                                                               June 30,           December 31,
                                                                                 1997                 1996
                                                                            ----------------     ----------------
<S>                                                                             <C>                  <C>     
          Panini credit arrangements---------------------------------           $   34.2             $   37.3
          DIP Loan---------------------------------------------------               94.2                 10.0
          Toy Biz Credit Facility------------------------------------               12.0                  -
                                                                             ------------         ------------
                                                                                $  140.4             $   47.3
                                                                             ============         ============


Debt consists of the following:

                                                                               June 30,            December 31,
                                                                                 1997                  1996
                                                                            ----------------     ----------------
          U.S. Term Loan Agreement-----------------------------------           $  350.0             $  350.0
          Amended and Restated Credit Agreement----------------------              120.0                120.0
          Chase Revolving Line of Credit ----------------------------               15.0                 15.0
          Panini Term Loan Agreement---------------------------------              121.6                139.3
          Other long term debt---------------------------------------               14.8                 16.3
                                                                             ------------         ------------

          Subtotal---------------------------------------------------              621.4                640.6
          Less amount reclassified*----------------------------------             (485.0)              (485.0)
          Less current maturities**----------------------------------             (121.6)               (10.6)
                                                                             ------------         ------------
                                                                                $   14.8             $  145.0
                                                                             ============         ============
</TABLE>


* Amounts as of June 30, 1997 have been reclassified to "Liabilities subject
to settlement under reorganization" in accordance with bankruptcy reporting
prescribed by Statement 90-7. See Note 2.

** Amount as of June 30, 1997 has been reclassified to "Current portion of
long-term debt" as a result of an event of default by Panini. See below.

         On December 20, 1996, the banks and financial institutions that were
parties to the Company's existing loan agreements (collectively with the U.S.
Term Loan Agreement (as defined below), the Amended and Restated Credit
Agreement (as defined below), the Chase Revolving Line of Credit (as defined
below ) and the Panini Term Loan Agreement (as defined below), the "Credit
Agreements") entered into a Standstill Agreement and Amendment (the
"Standstill Agreement") which grants the Company the right to maintain any
outstanding loans under the Credit Agreements as either Eurodollar or
Eurocurrency Loans during the Standstill Period (as defined below). The
Standstill Agreement also provided that the commitments under the Credit
Agreements would not automatically terminate or be accelerated upon the
commencement of the reorganization cases but rather would be suspended and
reinstated upon confirmation of the Initial Plan. Unless a payment default was
continuing or certain other termination events were triggered, each lender
under the Credit Agreements agreed not to exercise any remedies against any
subsidiary of Marvel which is not one of the Debtor Companies during the
Standstill Period. Each lender under the Credit Agreements agreed not to
transfer such Claim to any entity that does not agree to be bound by the
Standstill Agreement or support the Initial Plan. Pursuant to the Standstill
Agreement, the lenders under the Credit Agreements permitted the loans
outstanding thereunder to be outstanding as Eurodollar Loans (or the
equivalent) during the Standstill Period provided that, in the event that the
interest period for any such Eurodollar 

                                      12
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

Loans is longer than one month, such interest period would have a scheduled
expiration on or prior to June 30, 1997. The Standstill Period commenced on
December 27, 1996 and ended on June 30, 1997.

         On January 24, 1997, the Bankruptcy Court approved an order (the "DIP
Order") approving the DIP Loan, which was provided by a syndicate of lenders,
including The Chase Manhattan Bank, as agent bank. The DIP Loan matured on
June 30, 1997 and no repayment has occurred. The Debtor Companies also
received approval from the Bankruptcy Court to pay, on time and in full,
interest on the pre-petition debt of the Debtor Companies calculated at the
applicable non-default rate or rates provided for pursuant to the Credit
Agreements.

         On June 5, 1997, the Bankruptcy court approved an order suspending
the adequate protection payments being made by the Company to the Pre-petition
Banks. As a result, the Company has ceased interest payments on the U.S. Term
Loan Agreement, the Amended and Restated Credit Agreement and the Chase
Revolving Line of Credit. The amount of suspended adequate protection payments
as of June 30, 1997 was $3.7 and is not included in the liabilities of the
Company.

         On June 30, 1997, the DIP Loan matured and no repayment has occurred.
The DIP lenders agreed to forbear from taking any action through August 14,
1997. Such forbearance is continuing on a daily basis while the Company
negotiates a replacement DIP loan. With a full reservation of all rights, the
prepetition secured lenders have agreed not to object to the Debtors'
continued use of the cash collateral through August 20, 1997 on the same terms
and conditions and with the same protections as set forth in the current
financing and cash collateral order approved by the Bankruptcy Court.

         In July 1997, Panini, a subsidiary of the Company that has not filed
for protection under Chapter 11 and, therefore, is not one of the Debtors,
suspended all payments of interest and principal for the Panini Term Loan
Agreement. This action constitutes an event of default under the Panini Term
Loan Agreement, as defined below, and, consequently, the Company has
reclassified the Panini Term Loan to current liabilities.

         The liens securing the DIP Loan take first position (prime) over the
liens securing the Credit Agreements and are secured by a lien on the
Company's 26.6% equity interest in Toy Biz. Borrowings under the DIP Loan bear
interest at a rate per annum equal to the one month Eurodollar Rate (as
defined in the DIP Loan) rounded upwards to the next 1/16 of 1%, or Alternate
Base Rate (as defined in the DIP Loan) plus the Applicable Margin of 2-1/2%
with respect to Eurodollar Loans and 1-1/2% with respect with Alternate Base
Rate loans. Interest on Alternate Base Rate Loans is payable monthly in
arrears, and interest on Eurodollar Rate Loans is payable at the end of the
applicable interest period. Pursuant to the terms of the DIP Loan, the
outstanding balances of the current DIP facility after June 30, 1997 bear
interest at the penalty rate of Alternate Base Rate plus a margin of 3-1/2%,
which, at June 30, 1997 was approximately 12%.

         The DIP Loan includes various restrictive covenants prohibiting the
Company from, among other things, incurring additional indebtedness (with
certain limited exceptions), making investments, including for the Company's
strategic initiatives (with certain limited exceptions), and making dividend,
redemption and certain other payments on its capital stock. The DIP Loan also
contains certain customary financial covenants and events of default for
financings of this type, including a change of control covenant and an event
of default if the royalty free license from Marvel to Toy Biz is rejected in
the Marvel Cases.

         In conjunction with the Toy Biz IPO, Toy Biz entered into a three
year $30.0 revolving line of credit with a syndicate of banks for which The
Chase Manhattan Bank serves as administrative agent (the "Toy Biz Credit
Facility"). Substantially all of the assets of Toy Biz have been pledged to
secure borrowings under the Toy Biz Credit Facility. Borrowings under the Toy
Biz Credit Facility bear interest at either The Chase Manhattan Bank's
alternate base rate or at the Eurodollar rate plus, in each case, the
applicable margin. The applicable margin is 1% unless Toy Biz meets specific
financial operating levels, in which case the applicable margin decreases to
3/4 of 1%. 

                                      13
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

The credit facility requires Toy Biz to pay a commitment fee of 3/8
of 1% per annum on the average daily unused portion of the credit facility.

         The Toy Biz Credit Facility contains various financial covenants, as
well as restrictions on obtaining new indebtedness, prepaying or amending
subordinated debt, acquisitions and similar investments, the sale or transfer
of assets, capital expenditures, limitations on restricted payments,
dividends, issuing guarantees and creating liens. The credit facility also
requires that (a) the Company control Toy Biz and (b) that the exclusive,
royalty free perpetual worldwide license agreement between Toy Biz and the
Company remain in effect. The Toy Biz Credit Facility is not guaranteed by the
Company.

         Toy Biz is currently in default under the Toy Biz Credit facility as
a result of non-compliance with certain covenants. Toy Biz is seeking a waiver
of the provisions pertaining to the default and believes it could obtain a
replacement credit facility if a termination of the Toy Biz Credit Facility
were to occur, although there can be no assurance of Toy Biz's ability to do
so or the terms of such a replacement facility.

         Under credit arrangements for short-term borrowings arranged with a
group of banks, Panini may borrow up to Italian Lire 45.3 billion as of June
30, 1997 (approximately $26.7 based on exchange rates at June 30, 1997) on
such terms as Panini and the banks may mutually agree upon. These arrangements
generally do not have termination dates but are reviewed periodically for
renewal. At June 30, 1997, the unused portion of the credit lines was Italian
Lire 3.5 billion (approximately $2.0 based on exchange rates at June 30,
1997). The weighted average interest rate on short-term borrowings as of June
30, 1997 was 6.3%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information regarding a new credit
facility obtained by Panini.

         In April 1995, the Company entered into a $350.0 term loan agreement
(as amended) with a syndicate of banks, the Co-Agents and The Chase Manhattan
Bank, as administrative agent (the "U.S. Term Loan Agreement"). Loans under
the U.S. Term Loan Agreement bear interest at a rate per annum equal to the
Eurodollar Rate (as defined in the U.S. Term Loan Agreement), or the Alternate
Base Rate (as defined in the U.S. Term Loan Agreement) plus, in each case, the
Applicable Margin (as defined in this paragraph). Eurodollar Rate Loans will,
at the option of the Company, have interest periods of one, two, three or six
months. Applicable Margin means (a) with respect to Eurodollar Rate loans, 3%
and (b) with respect to Alternate Base Rate loans, 2%. Interest on Alternate
Base Rate Loans is payable quarterly in arrears, and interest on Eurodollar
Rate Loans is payable at the end of the applicable interest period, except
that if the interest period is six months, interest is payable ninety days
after the commencement of the interest period and at the end of the interest
period. If adequate protection payments were not suspended, ABR borrowings
would have a rate of 10.5% as of June 30, 1997.

         On August 30, 1994 the Company entered into a $120.0 revolving loan
agreement with a syndicate of banks, the Co-Agents and The Chase Manhattan
Bank, as administrative agent (the "Amended and Restated Credit Agreement").
Loans under the Amended and Restated Credit Agreement bear interest at a rate
per annum equal to the Eurodollar Rate (as defined in the Amended and Restated
Credit Agreement), or the Alternate Base Rate (as defined in the Amended and
Restated Credit Agreement) plus, in each case, the Applicable Margin (as
defined in this paragraph). Eurodollar Rate Loans will, at the option of the
Company, have interest periods of one, two, three or six months. Applicable
Margin means (a) with respect to Eurodollar Rate loans, 3% and (b) with
respect to Alternate Base Rate loans, 2%. Interest on Alternate Base Rate
Loans is payable quarterly in arrears, and interest on Eurodollar Rate Loans
is payable at the end of the applicable interest period, except that if the
interest period is six months, interest is payable ninety days after the
commencement of the interest period and at the end of the interest period. If
adequate protection payments were not suspended, ABR borrowings would have a
rate of 10.5% as of June 30, 1997.

         During March 1996, the Company entered into a $25.0 revolving line of
credit (as amended) with Chase Manhattan (the "Chase Revolving Line of Credit)
which was subsequently reduced to $15.0. The Chase Revolving Line of Credit is
pari passu with the U.S. Term Loan Agreement, the Amended and Restated Credit
Agreement, and 

                                      14
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

the Panini Term Loan Agreement. The Chase Revolving Line of Credit bears
interest at a rate per annum equal to the Eurodollar Rate (as defined in the
Amended and Restated Credit Agreement), plus 3%, or the Alternate Base Rate
(as defined in the Amended and Restated Credit Agreement) plus 2%. Interest on
Alternate Base Rate Loans is payable quarterly in arrears, and interest on
Eurodollar Rate Loans is payable at the end of the applicable interest period,
except that if the interest period is six months, interest is payable ninety
days after the commencement of the interest period and at the end of the
interest period. If adequate protection payments were not suspended, ABR
borrowings would have a rate of 10.5% as of June 30, 1997.

         On August 30, 1994, the Company, Marvel Italia Srl (now Panini
S.p.A.) and Instituto Bancario San Paolo Di Torino S.p.A. (the "Lender"),
entered into a term loan and guarantee agreement (the "Panini Term Loan
Agreement") providing for a term loan credit facility of Italian Lire 244.5
billion (approximately $154.0 based on exchange rates in effect on the date of
acquisition) (the "Term Loan Facility").

         The Panini Term Loan Facility bears interest at a rate per annum
equal to the Eurocurrency Rate (as defined in the Panini Term Loan Agreement)
or, in certain limited circumstances, the Negotiated Rate (as defined in the
Panini Term Loan Agreement), in each case plus the Applicable Margin (as
defined in this paragraph). Eurocurrency Rate Loans have, at the option of
Panini, interest periods of one, two, three or six months. Applicable Margin
means (a) with respect to Eurocurrency Loans 3% and (b) with respect to
Negotiated Rate Loans, 2%. Interest on Negotiated Rate Loans is payable
quarterly in arrears and interest on Eurocurrency Rate Loans is payable at the
end of the applicable interest period, except that if the interest period is
six months, interest is payable ninety days after the commencement of the
interest period and at the end of the interest period. If Panini had not
ceased interest and principal payments, one month Eurocurrency borrowings
would have a rate of 9.8125% as of June 30, 1997.

         The U.S. Term Loan Agreement (through incorporation by reference to
the Amended and Restated Credit Agreement), the Amended and Restated Credit
Agreement, Chase Revolving Line of Credit Agreement (through incorporation by
reference to the Panini Term Loan Agreement), and the Panini Term Loan
Agreement include various restrictive covenants prohibiting the Company from,
among other things, incurring additional indebtedness, with certain limited
exceptions, and making dividend, redemption and certain other payments on its
capital stock. The U.S. Term Loan Agreement, the Amended and Restated Credit
Agreement and the Panini Term Loan Agreement also contain certain customary
financial covenants and events of default for financing of this type,
including a change of control covenant. Mandatory prepayments are required to
be made out of net proceeds from sales of assets by the Company, with certain
exceptions, and from certain excess cash flow (as defined in the Amended and
Restated Credit Agreement).

         The Credit Agreements and its respective lenders (the "secured
lenders") are secured with substantially all of the Company's domestic assets,
other than the Company's investment in common stock of Toy Biz, and all of the
capital stock of the Company's domestic subsidiaries and 65% of the capital
stock of the Company's first tier foreign subsidiaries.

         The filing of petitions for relief under Chapter 11 of the Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware by the
Debtor Companies is an event of default under the Credit Agreements.


5.       RESTRUCTURING OF OPERATIONS

         In the fourth quarter of 1995, the Company recorded restructuring
charges of $25.0 related primarily to publishing and confections operations.
As part of the restructuring, the Company terminated approximately 275
employees, covering editorial, production, distribution and administrative
employee groups and, accordingly, provided for $10.7 of termination benefits,
of which $9.5 has been paid as of June 30, 1997. Additionally, approximately
$6.7 of the restructuring charges relates to facility closure, of which $5.7
has been paid as of June 30, 1997, and $7.6 of the restructuring charges
relates to other costs, of which $7.1 has been paid as of June 30, 1997. A
substantial portion of the 

                                      15
<PAGE>
                       MARVEL ENTERTAINMENT GROUP, INC.
                             DEBTOR-IN-POSSESSION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

remaining amount of $2.7 as of June 30, 1997, which is included in accrued
expenses and other, is scheduled to be paid in accordance with the terms of
various agreements or are "liabilities subject to settlement under
reorganization".

         In the fourth quarter of 1996, the Company recorded restructuring
charges of $15.8 related primarily to the publishing and trading card
operations; the closing of the comic book distribution subsidiary and the
closing or sale of a certain confections facility. As part of the
restructuring, the Company has terminated approximately 200 employees,
covering editorial, production, distribution and administrative employee
groups and, accordingly, provided for $6.6 of termination benefits of which
$2.6 has been paid as of June 30, 1997. The remaining approximate $9.2 of the
restructuring charges relates to facility closure or sale of which $0.6 has
been paid as of June 30, 1997 and $6.5 was used to write-down certain fixed
assets. A substantial portion of the remaining amount of $6.1 as of June 30,
1997, which is included in accrued expenses and other, is scheduled to be paid
in accordance with the terms of various agreements or are "liabilities subject
to settlement under reorganization".

                                      16
<PAGE>
                        MARVEL ENTERTAINMENT GROUP, INC.
                             (DEBTOR-IN-POSSESSION)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

6.      FINANCIAL STATEMENTS OF ENTITIES OPERATING UNDER CHAPTER 11

The combined condensed balance sheet as of June 30,1997 of the Debtor Companies
is as follows (See Note 2):

<TABLE>
<CAPTION>
ASSETS
<S>                                                     <C>   
Current assets:
   Cash..................................               $ 15.6
   Accounts receivable, net..............                 36.7
   Inventories, net......................                 27.2
   Income tax receivable.................                 10.9
   Prepaid expenses and other............                  5.2
                                                     ----------

      Total current assets...............                 95.6

Property, plant and equipment, net.......                  9.4
Goodwill and other intangibles, net......                188.3
Deferred charges and other...............                 22.3
Investments in and advances to subsidiaries               62.6
                                                    ----------
      Total  Assets......................               $378.2
                                                    ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable......................               $ 21.4
   Accrued expenses and other............                 75.2
   Short term borrowings.................                 94.2
   Liabilities subject to settlement under 
   reorganization........................                 28.7
                                                    ----------

     Total current liabilities...........                219.5

Other long-term liabilities..............                 11.3
Liabilities subject to settlement under
reorganization...........................                473.5
                                                    ----------

     Total Liabilities...................                704.3
                                                    ----------

Stockholders' deficit:
   Additional paid-in capital............                 94.1 
   Accumulated deficit ..................               (420.0)
   Cumulative translation adjustment ....                 (0.2)
                                                    ----------

     Total Stockholders' Deficit.........               (326.1)
                                                    ----------
     Total Liabilities and Stockholders' Deficit        $378.2
                                                    ==========
</TABLE>

                                      17

<PAGE>
                        MARVEL ENTERTAINMENT GROUP, INC.
                             (DEBTOR-IN-POSSESSION)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

The combined condensed statement of operations for the six months ended June
30, 1997 of the Debtor Companies is as follows:
<TABLE>
<CAPTION>

<S>                                                            <C>     
Net revenues.............................................      $  102.4

Cost of sales............................................          75.1

Selling, general & administrative expenses...............          49.3

Depreciation and amortization............................           3.5

Amortization of goodwill, intangibles and deferred
charges..................................................           6.6

Interest expense, net (contractual interest for the 
  six months ended June 30, 1997 was $24.5)..............          20.8

Equity in net loss of unconsolidated subsidiaries and 
other, net...............................................          (5.2)

Equity in net loss of non-debtor companies...............          (5.1)
                                                              ----------

Loss before reorganization items and provision for income
taxes....................................................         (63.2)

Reorganization items.....................................           6.0
                                                              ----------

Loss before provision for income taxes...................         (69.2)

Provision for income taxes...............................           0.4
                                                              ----------

Net loss.................................................        ($69.6)
                                                              ==========
</TABLE>






  
                                    18


<PAGE>




          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

GENERAL

         Marvel Entertainment Group, Inc. (together with its subsidiaries, as
applicable, "Marvel" or the "Company") is a leading creator, publisher and
distributor of youth entertainment products for domestic and international 
markets based on fictional action adventure characters owned by the Company 
(the "Marvel Characters"), licenses from professional athletes, sports teams 
and leagues and popular entertainment characters and other properties owned by 
third parties. The Company also licenses the Marvel Characters and properties 
for consumer products, television and film projects, on-line and interactive
software, and advertising promotions. The Company's products include comic
book and other children's publications, sports and entertainment trading
cards, activity stickers, toys, adhesive paper and confectionery products.

RESULTS OF OPERATIONS

         In recent years there has been an overall decline in the comic book
market, and more specifically, a significant reduction in speculative
purchases of comic books and reduced readership, which has adversely affected
the Company's publishing business. In response, the Company has undertaken
several strategic actions to mitigate the effect of such contraction. However,
to date these actions have not been successful in overcoming the overall
decline in the comic book market.

         Similarly, there has been a significant contraction in the sports and
entertainment trading card markets. The contraction in sports trading cards is
related in part to lower speculative purchases and the residual impact of the
baseball, hockey and basketball labor situations in 1994 and 1995. The level
of demand for entertainment trading cards is dependent on, among other
factors, the commercial success and media exposure of the Marvel Characters
and third party licensed products, as well as the market conditions in the
comic book specialty stores. In 1994 and 1995, the sale of entertainment cards
based on the Marvel Characters and third party licensed characters
substantially offset the decline in sports trading cards. However, since 1995,
the lack of a commercially successful entertainment card property (e.g. a Lion
King TM) has resulted in an inability to offset the decline in sports trading
cards. The Company has significant minimum royalty guarantees and advertising
commitments with its licensors. As a result of the continued decline in
overall trading card sales, the Company has experienced very significant
losses in recent years. There can be no assurance that the Company will reach
the volumes required to make the current contracts profitable or to be able to
renegotiate more favorable terms for these contracts to enable the Company to
return to profitability.

         The Company experienced significant operating losses during 1995 and
1996, and failed to satisfy certain financial covenants contained in the
Credit Agreements (see Note 4 of "Notes to Condensed Consolidated Financial
Statements") beginning in the Fall of 1996. The Company commenced discussions
in the Fall of 1996 with Andrews Group, formerly its indirect parent,
regarding an equity infusion in order to provide for the Company's cash
requirements and with The Chase Manhattan Bank, agent bank for the Credit
Agreements, regarding a restructuring of the Credit Agreements.

         On December 27, 1996, Marvel along with certain of its operating and
inactive subsidiaries, Fleer; SkyBox; Marvel Characters, Inc.; Heroes World
Distribution, Inc.; The Asher Candy Company; Malibu; Frank H. Fleer Corp. and
Marvel Direct Marketing Inc. filed petitions for relief and a plan of
reorganization under chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. Panini, Marvel
Restaurants (a general partner in the joint venture developing the Marvel
Mania restaurants) and Toy Biz, all of which are active, as well as certain
subsidiaries did not file petitions under the Bankruptcy Code.

         The Debtor Companies received approval from the Bankruptcy Court to
pay on time and in full undisputed pre-petition obligations including
salaries, wages and benefits to all of its employees, trade creditors and
independent contractors and to continue funding its strategic initiatives. On
January 24, 1997 the Bankruptcy Court approved a $100.0 million DIP Loan,
which is provided by a syndicate of lenders, including The Chase Manhattan
Bank, as agent bank. The DIP Loan matured on June 30, 1997. The DIP Loan is
subject to covenants and events of default including a 

                                      19
<PAGE>

change of control of Marvel (as defined therein). See Note 4 of Notes to
Condensed Consolidated Financial Statements.

         On June 20, 1997, the District Court vacated the Bankruptcy Court's
Stay Order which permitted Marvel Holdings to vote the stock, replace the
Board of Directors and take control of the Company. On July 10, 1997 Marvel
and its affiliated Chapter 11 debtors, High River Limited Partnership,
Westgate International L.P., Toy Biz, Inc., Isaac Permutter, Avi Arad and The
Chase Manhattan Bank announced that they reached an agreement in principle to
combine Marvel and Toy Biz into a new company and to turn the assets of
Fleer/SkyBox and Panini over to the debtor group for the purpose of selling
those assets. See Note 2 of Notes to Condensed Consolidated Financial
Statements.

         There can be no assurance that the proposed agreement in principle or
any other plan of reorganization will be confirmed under the Bankruptcy Code.
If the Company is unable to obtain confirmation of a plan of reorganization,
its creditors or equity security holders may seek other alternatives for the
Company, including bids for the Company or parts thereof through an auction
process. The Company has, and will continue to incur professional fees and
other cash demands typically incurred in bankruptcy. However, on June 17, 1997
the Bankruptcy Court ordered a suspension on the payment of professional fees.
The Company has incurred, through June 30, 1997, approximately $11.5 million
in reorganization items.

         The Company believes that since, and in part as a result of, the
commencement of the Company's chapter 11 proceedings, the Company has
continued to experience greater than expected weakness in certain businesses
due to, among other things, certain mass merchandisers maintaining lower than
expected levels of inventory of the Company's products and the Company
realizing lower licensing revenues. The Company believes that these lower
inventory levels and licensing revenues relate to customers' concerns as to
the impact of the bankruptcy of the Debtor Companies on the future of the
Company's brands. There can be no assurance that upon consummation of a plan
of reorganization that there will be improvement in any of such businesses.

THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996.

         The Company's net revenues were $129.6 million and $182.2 million in
1997 and 1996, respectively, a decrease of $52.6 million or 28.9%. This
reflects a decrease of $35.5 million in net trading card and sticker revenues,
a decrease of $10.9 million in toy revenues, a decrease of $3.2 million in
licensing revenues, a decrease of $2.3 million in net publishing revenues and
a decrease of $0.7 million in other revenues.

         The decrease in trading card net revenues was primarily due to the
continuing general decline in the demand for trading cards. The general
decline in the market and concerns arising out of the Company's chapter 11
proceedings has resulted in certain mass merchandisers maintaining lower
levels of inventory. In particular, entertainment card net revenues decreased
due to lower commercial success of third party licensed properties in the 1997
period as compared to the 1996 period, as well as lower sales of cards based
on the Marvel Characters. The decrease in net revenues of stickers was
primarily due to a general market softness for stickers in Western Europe and
in part the result of lower commercial success of licensed third party
entertainment products. Given the aforementioned, Panini undertook a strategic
change in 1997 to lower its distribution of its sticker products, thereby
improving its efficiency and lowering the risk of return.

         The decrease in toy revenues was principally due to lower domestic
sales resulting from retailers concerns arising out of the Company's chapter
11 proceedings and the related Marvel brands and the timing of certain
promotional doll shipments until after the second quarter.

         The decrease in licensing revenue primarily was due to the
renegotiation of the America Online ("AOL") agreement which required a partial
write-down of revenues previously recognized under the old agreement. This new
agreement has given Marvel the right to develop new revenue opportunities on
the Internet and on the AOL network previously prohibited under the old
agreement. The decrease in net publishing revenues primarily was due to the
impact on the Company of the continuing decline in the overall comic book
market. The decrease in other revenues primarily was due to decreased sales of
confectionery products by Fleer and adhesive paper by Panini.

                                      20
<PAGE>

         Gross profit was $33.2 million and $66.8 million in the 1997 and 1996
periods, respectively, a decrease of $33.6 million. As a percentage of net
revenues, gross profit was 25.6% in the 1997 period as compared to 36.7% in
the 1996 period. The decrease in gross profit as a percentage of net revenues
was due primarily to the effect of lower trading card net revenues without a
corresponding decrease in royalty expense given minimum payment obligations
for trading cards and an unfavorable product mix for trading cards and toys as
compared to the 1996 period.

         Selling, General & Administrative ("SG&A") expenses were $51.5
million and $55.6 million in the 1997 and 1996 periods, respectively. The
decrease of $4.1 million was mainly attributable to the decrease in
advertising, promotion and selling expenses of the Company and a general
reduction in overhead expenses associated with the restructuring of the comic
book publishing and distribution, trading card and confectionery operations.
As a percentage of net revenues, SG&A was 39.7% in the 1997 period as compared
to 30.5% in the 1996 period. The increase in SG&A as a percentage of net
revenues was due primarily to certain fixed costs inherent in operating the
business that cannot be reduced in the short term.

         Depreciation and amortization was $7.7 million and $4.9 million in
the 1997 and 1996 periods, respectively. The increase of $2.8 million was
primarily due to the amortization of animation costs by the comic book
division related to the Hulk television series and higher expense resulting
from an increased investment to support Toy Biz's expanded product line,
partially offset by a reduction in depreciation expense of certain fixed
assets of the Company's comic book direct market distribution subsidiary in
the 1997 period compared to the 1996 period as a result of the closure of such
facility. As part of such closure these fixed assets were written off in late
1996 as part of the restructuring program.

         Amortization of goodwill, intangibles and deferred charges was $4.1
million and $5.5 million in the 1997 and 1996 periods, respectively. The
decrease of $1.4 million mainly reflects lower expense in the 1997 period due
to the write-down of goodwill and other intangibles in the fourth quarter of
1996 partially offset by a shorter amortization period. This write-down
related to asset impairment which was primarily due to the significant and
long-term changes in industry conditions in trading cards and publishing. See
Note 2 of Notes to Consolidated Financial Statements for a further discussion 
on goodwill and other intangibles.

         Interest expense, net was $13.2 million and $13.8 million in the 1997
and 1996 periods, respectively. The decrease in interest expense of $0.6
million primarily reflects a Bankruptcy Court ruling permitting the suspension
of adequate protection payments by the Company on the U.S. Term Loan, the
Amended and Restated Credit Agreement and the Chase Revolving Line of Credit
and therefore, in accordance with Statement of Position 90-7 ("SOP 90-7"),
suspension of an interest expense accruals for same. The unrecorded interest
on the above for the period was $3.7 million. In the second quarter of 1997,
the Company incurred DIP interest expense of $1.8 million.

         Equity in net (loss) income of unconsolidated subsidiaries includes a
write-down of approximately $5.5 million in 1997, related to the Company's
investment in Marvel theme restaurants. The current plans for the Company are
to open one restaurant and find alternative financing and or licensing
arrangements for a number of restaurants in the future. As a result, the
Company revalued it investment in these assets.

         Total bankruptcy reorganization items of $2.6 million for the 1997
period includes professional charges and other costs typical to those incurred
by entities in bankruptcy. On June 17, 1997 the Bankruptcy Court ordered a
suspension of the payment of professional fees associated with the bankruptcy.

         The benefit for income taxes was $4.6 million and $5.4 million in the
1997 and 1996 periods, respectively. The 1997 tax benefit primarily represents
the impact of losses from Toy Biz's operations. Due to significant uncertainty
of the future business operations of the Company, the Company has stopped
recording a tax benefit for each of the domestic companies other than Toy Biz.
The 1996 tax benefit represented the impact of losses in all of Marvel's
operations offset by a tax provision on income from Toy Biz's operations.

         Minority interest in (loss) earnings of Toy Biz was ($3.9) million
and $2.9 million in the 1997 and 1996 periods, respectively. The decrease in
minority interest was primarily due to a net loss in 1997 compared to net
income in 1996 at Toy Biz partially offset by Marvel's reduced ownership
percentage. See Note 2 of Notes to Condensed Consolidated Financial Statements

                                      21
<PAGE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996

         The Company's net revenues were $286.3 million and $371.8 million in
1997 and 1996, respectively, a decrease of $85.5 million or 23.0%. This
reflects a decrease of $63.6 million in net trading card and sticker revenues,
a decrease of $14.9 million in toy revenues, a decrease of $5.7 million in
licensing revenues and a decrease of $3.5 million in net publishing revenues,
partially offset by a $2.2 million increase in other revenues.

         The decrease in trading card net revenues was primarily due to the
continuing general decline in the demand for trading cards. The general
decline in the market and concerns arising out of the Company's chapter 11
proceedings has resulted in certain mass merchandisers maintaining lower
levels of inventory. In particular, entertainment card net revenues decreased
due to lower commercial success of third party licensed properties in the 1997
period as compared to the 1996 period, as well as lower sales of cards based
on the Marvel Characters. The decrease in net revenues of stickers was
primarily due to a general market softness for stickers in Western Europe and
in part the result of lower commercial success of licensed third party
entertainment products. Given the aforementioned, Panini undertook a strategic
change in 1997 to lower its distribution of its sticker products, thereby
improving its efficiency and lowering the risk of return.

         The decrease in toy revenues was principally due to lower domestic
sales resulting from retailers concerns arising out of the Company's chapter
11 proceedings and the related Marvel brands and the timing of certain
promotional doll shipments until after the second quarter.

         The decrease in licensing revenue primarily was due to the
renegotiation of the AOL agreement which required a partial write-down of 
revenues previously recognized under the old agreement. This new agreement has 
given Marvel the right to develop new revenue opportunities on the Internet 
and on the AOL network previously prohibited under the old agreement. 
Additionally, licensing revenues decreased in the 1997 period as compared to 
the 1996 period in part as a result of the difficulty of the Company in 
entering into licensing arrangements due to licensees concerns arising out of 
the Company's chapter 11 proceedings, and in part to an insufficient amount of 
new media exposure of the Company's characters. Pursuant to the agreement 
between Fox Kid's Worldwide ("FKW") and the Company, the Company expects to 
have a new animation series based on the SILVER SURFER on the Fox Children's 
Network ("FCN") in the 1997-1998 broadcast season. Licensing revenues will 
vary from period to period depending on the volume and extent of licensing 
agreements entered into during any particular financial period, as well as the 
level and commercial success of the media exposure of the Marvel Characters. 
The decrease in net publishing revenues primarily was due to the impact on the
Company of the continuing decline in the overall comic book market. The 
improvement in other revenues primarily was due to increased sales of 
confectionery products by Fleer and adhesive paper by Panini.

         Gross profit was $85.4 million and $142.5 million in the 1997 and
1996 periods, respectively, a decrease of $57.1 million. As a percentage of
net revenues, gross profit was 29.8% in the 1997 period as compared to 38.3%
in the 1996 period. The decrease in gross profit as a percentage of net
revenues was due primarily to the effect of lower trading card net revenues
without a corresponding decrease in royalty expense given minimum payment
obligations for trading cards, the effect of lower licensing revenues and an
unfavorable product mix for trading cards and toys as compared to the 1996
period.

         SG&A expenses were $100.0 million and $107.9 million in the 1997 and
1996 periods, respectively. The decrease of $7.9 million was mainly
attributable to the decrease in advertising, promotion and selling expenses of
the Company and a general reduction in overhead expenses associated with the
restructuring of the comic book 

                                      22
<PAGE>

publishing and distribution, trading card and confectionery operations. As a
percentage of net revenues, SG&A was 34.9% in the 1997 period as compared to
29.0% in the 1996 period. The increase in SG&A as a percentage of net revenues
was due primarily to certain fixed costs inherent in operating the business
that cannot be reduced in the short term.

         Depreciation and amortization was $12.5 million and $9.3 million in
the 1997 and 1996 periods, respectively. The increase of $3.2 million was
primarily due to the amortization of animation costs by the comic book
division related to the Hulk television series and higher expense resulting
from an increased investment to support Toy Biz's expanded product line,
partially offset by a reduction in depreciation expense of certain fixed
assets of the Company's comic book direct market distribution subsidiary in
the 1997 period compared to the 1996 period as a result of the closure of such
facility. As part of such closure these fixed assets were written off in late
1996 as part of the restructuring program.

         Amortization of goodwill, intangibles and deferred charges was $8.4
million and $11.0 million in the 1997 and 1996 periods, respectively. The
decrease of $2.6 million mainly reflects lower expense in the 1997 period due
to the write-down of goodwill and other intangibles in the fourth quarter of
1996 partially offset by a shorter amortization period. This write-down
related to asset impairment which was primarily due to the significant and
long-term changes in industry conditions in trading cards and publishing. See
Note 2 of Notes to Consolidated Financial Statements for a further discussion
on goodwill and other intangibles.

         Interest expense, net was $28.8 million and $27.5 million in the 1997
and 1996 periods, respectively. The increase in interest expense of $1.3
million primarily reflects the interest expense on borrowings under the DIP
Loan in 1997, increased borrowings under the Credit Agreements and Panini's
short term lines of credit compared to the 1996 period and higher average
borrowing rates. These increases were partially offset by a Bankruptcy Court
ruling permitting the suspension of adequate protection payments by the
Company on the U.S. Term Loan, the Amended and Restated Credit Agreement and
the Chase Revolving Line of Credit and therefore, in accordance with SOP 90-7,
suspension of an interest expense accruals for same. The unrecorded interest
on the above for the period was $3.7 million. In the first six months of 1997,
the Company incurred DIP interest expense of $2.8 million.

         Equity in net (loss) income of unconsolidated subsidiaries includes a
write-down of approximately $5.5 million in 1997, related to the Company's
investment in Marvel theme restaurants. The current plans for the Company are
to open one restaurant and find alternative financing and or licensing
arrangements for a number of restaurants in the future. As a result, the
Company revalued it investment in these assets.

         Total bankruptcy reorganization items of $6.0 million for the 1997
period includes professional charges and other costs typical to those incurred
by entities in bankruptcy. On June 17, 1997 the Bankruptcy Court ordered a
suspension of the payment of professional fees associated with the bankruptcy.

         The benefit for income taxes was $0.8 million and $3.7 million in the
1997 and 1996 periods, respectively. The 1997 tax benefit primarily represents
the impact of losses from Toy Biz's operations. Due to significant uncertainty
of the future business operations of the Company, the Company has stopped
recording a tax benefit for each of the domestic companies other than Toy Biz.
The 1996 tax benefit represented the impact of losses in all of Marvel's
operations offset by a tax provision on income from Toy Biz's operations.

         Minority interest in (loss) earnings of Toy Biz was ($3.5) million
and $4.9 million in the 1997 and 1996 periods, respectively. The decrease in
minority interest was primarily due to a net loss in 1997 compared to a net
income in 1996 at Toy Biz partially offset by Marvel's reduced ownership
percentage. See Note 2 of Notes to Condensed Consolidated Financial Statements.


                                      23
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         On December 27, 1996 in connection with the filing of their petitions
in the Bankruptcy Court, the Debtor Companies received approval to pay on time
and in full undisputed pre-petition obligations including salaries, wages and
benefits to all of its employees, trade creditors and independent contractors
and to continue funding its strategic initiatives. On January 24, 1997 the
Bankruptcy Court approved the $100 million DIP Loan, which is provided by a
syndicate of lenders, including The Chase Manhattan Bank, as agent bank. The
DIP Loan matured on June 30, 1997. The DIP Loan is subject to covenants and
events of default including a change of control of Marvel (as defined
therein). See Note 4 of "Notes to Condensed Consolidated Financial
Statements."

         On June 5, 1997, the Bankruptcy court approved an order suspending
adequate protection payments being made by the Company to the Pre-petition
Banks. As a result, the Company has ceased interest payments on the U.S. Term
Loan Agreement, the Amended and Restated Credit Agreement, and the |Chase
Revolving Line of Credit.

         On June 30, 1997, the DIP Loan matured and no repayment has occurred.
The DIP lenders agreed to forbear from taking any action through August
14, 1997. Such forbearance is continuing on a daily basis while the Company
negotiates a replacement DIP loan. With a full reservation of all rights, the
prepetition secured lenders have agreed not to object to the Debtors'
continued use of the cash collateral through August 20, 1997 on the same terms
and conditions and with the same protections as set forth in the current
financing and cash collateral order approved by the Bankruptcy Court.

         The Company is in negotiations with The Chase Manhattan Bank (the
current DIP Loan Agent) and a syndicate of banks to obtain a replacement DIP
loan. Additionally, the Company has received a proposal from High River and
Westgate to provide for a replacement DIP loan on terms that are no less
favorable than the current DIP Loan and which will expire no earlier than
December 31, 1997. However, the proposed replacement DIP loan from High River
and Westgate has not been consented to by the Company's secured lenders and
there can be no assurance that the Bankruptcy Court will approve a replacement 
loan facility without such consent. Marvel intends to use $94.2 million of the 
replacement DIP loan to retire the existing DIP Loan. Although there can be no 
assurance, the Company expects that funds available under a replacement DIP 
loan together with internally generated funds would be sufficient through 
December 31, 1997 to enable the Debtor Companies to meet their consolidated 
cash requirements, including servicing the replacement DIP loan. Any 
replacement DIP loan is expected to be subject to a number of events of 
default and conditions of borrowing. There can be no assurance, however, that 
a replacement DIP loan can be obtained. If no such replacement DIP loan is 
obtained, the Company may be forced to seek emergency relief under the 
Bankruptcy Code and begin to sell and/or liquidate assets, close certain 
business operations, seek other financing alternatives or a combination of all 
of the above.

         In July 1997, Panini, a subsidiary of the Company that has not filed
for protection under Chapter 11 and, therefore, is not one of the debtor
companies, suspended all payments of interest and principal under the Panini
Term Loan Facility. This action constitutes an event of default under the
Panini Term Loan Agreement and, consequently, the Company has reclassified the
Panini Term Loan to current liabilities. On August 11, 1997, Panini entered 
into an agreement with The Chase Manhattan Bank for a loan of Italian Lire 
27 billion to provide short term liquidity. On August 5, 1997, the Company 
received approval from the Bankruptcy Court to guarantee this loan. This 
guarantee is junior to tall liens of the secured creditors and the DIP lenders.
In connection with the proposed global settlement, this guarantee by Marvel 
will be assigned to the secured lenders. This loan is subject to a number of 
events of default and conditions of borrowing. Although there can be no 
assurance, the Company believes that Panini should be able to meet its cash 
requirements for the near term using the Italian Lire 27 billion short term 
liquidity loan and internally generated funds. In the event such liquidity 
sources are not sufficient, Panini may be required to seek one or more 
alternatives to provide for its cash requirements, including seeking 
additional lines of credit or borrowings or sales of assets. There can be no 
assurance that Panini will be able to obtain such lines of credit or 
consummate any such asset sales on satisfactory terms.

         Toy Biz is currently in default under the Toy Biz Credit facility as
a result of non-compliance with certain covenants. Toy Biz is seeking a waiver
of the provisions pertaining to the default and believes it could obtain a
replacement credit facility if a termination of the Toy Biz Credit Facility
were to occur, although there can be no 

                                      24
<PAGE>
assurance of Toy Biz's ability to do so or the terms of such a replacement
facility. Toy Biz anticipates that its internally generated funds, together
with borrowings under its credit agreement, provided that it obtains a waiver
of its current default under its credit facility or obtains a replacement
facility, will be sufficient to enable Toy Biz to meet its peak working
capital needs and capital expenditure requirements. See Notes 2 and 4 of
"Notes to Condensed Consolidated Financial Statements".

         As of July 31, 1997, the Company's outstanding bank indebtedness was
approximately $742.3 million, of which $94.2 million relates to borrowings
under the DIP Loan, $599.4 million relates to borrowings under the Credit
Agreements, approximately Italian Lire 25 billion (approximately $13.9 million
based on exchange rates at July, 31, 1997) relates to borrowings for Panini's
Adespan adhesives facility, approximately Italian Lire 40.8 billion
(approximately $22.8 million based on exchange rates at July 31, 1997) relates
to borrowings under Panini's short term lines of credit and $12.0 million
which relates to Toy Biz's line of credit.

         As Chapter 11 debtors, the Debtor Companies may (subject, in certain
circumstances, to Bankruptcy Court approval) sell or otherwise dispose of
assets, and liquidate or settle liabilities for amounts other than those
reflected in the condensed consolidated financial statements. The amounts
reported in the condensed consolidated financial statements do not give effect
to any adjustments to the carrying value of assets or amount of liabilities
that might result as a consequence of any such actions or consummation of the
agreement in principle reached on July 10, 1997. If the Company is unable to
obtain confirmation of a plan of reorganization, its creditors or equity
security holders may seek other alternatives for the Company, including bids
for the Company or parts thereof through an auction process. In that event, it
is possible that the carrying value of certain assets would not be realized
and additional liabilities and claims would be asserted which are not
presently reflected in the condensed consolidated financial statements and
which are not presently determinable. The effect of any such assertion or 
non-realization could be material.

         Net cash used in operating activities was $62.0 million and $40.4
million for the six months ended June 30, 1997 and 1996, respectively. The use
of funds in the 1997 period was principally due to the loss from operations
and a decrease in working capital. Cash shown on the Condensed Consolidated
Balance Sheet at June 30, 1997 of $25.3 million includes $4.6 million of Toy
Biz cash.

         Cash used in investing activities was $25.3 million and $21.5 million
for the six months ended June 30, 1997 and 1996, respectively. The primary use
of these funds in the 1997 period was for capital expenditures for tooling and
molds and capitalized product development costs related to Toy Biz and capital
expenditures of Panini.

         Cash provided by financing activities was $89.5 million and $30.1
million for the six months ended June 30, 1977 and 1996, respectively. The
cash provided by financing activities for 1997 was primarily due to borrowings
under the DIP Loan, and for 1996 cash provided by financing activities was
primarily due to net borrowings under the Company's revolving credit
facilities.

         On April 24, 1997, as a result of action taken by holders of the debt
securities issued by the Company's three parent holding companies to exercise
voting action over the common stock of Marvel and such holding companies
pledged to secure such debt securities, Marvel is no longer consolidated for
federal income tax purposes with Mafco. As a result of such tax
deconsolidation, the Company will retain an allocated portion, if any, of net
operating loss carryforwards ("NOLs") of the Mafco affiliated group. Such
allocation is not yet determinable. Such NOLs will be limited under federal
income tax laws since a change of control of the Company has occurred. Further
limitation could result if a plan of reorganization is consummated.

         The Company expects to incur approximately $1.2 million in net
production costs for the INCREDIBLE HULK animated series being produced for
the 1997-1998 broadcast year. In addition, with respect to the Company's
agreement with FKW, the Company will be required to reimburse FKW a portion of
its production costs. One-half of such amounts are expected to be reimbursed
to the Company by Toy Biz pursuant to the understanding with respect to Marvel
Studios.

          The Company is continuing development of Marvel theme restaurants.
The first restaurant to open, which will be in Los Angeles, is under
construction and is projected to open in the second half of 1997. The Company

                                      25
<PAGE>

has made most of the required investment for the Los Angeles restaurant, with
the exception of costs related to opening food and merchandising inventories.
In view of current financial conditions, the Company is considering other
financing alternatives, including but limited to licensing its characters for
use in restaurants.

         Toy Biz has authorized the repurchase of up to three million shares
of Class A common stock. Toy Biz has not commenced the repurchase program and
has no intention to do so.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share", which established new standards for computing and
presenting earnings per share. SFAS No. 128 will be effective for interim and
annual financial statements after December 15, 1997. The Company believes that
the adoption of SFAS No. 128 will not have a material impact on the Company's
reported earnings per share.

                          FORWARD-LOOKING STATEMENTS

         Statements in this quarterly report on Form 10-Q for the quarter
ended June 30, 1997 such as "intend", "estimated", "believe", "expect",
"anticipate" and similar expressions which are not historical are
forward-looking statements that involve risks and uncertainties. Such
statements include, without limitation, the Company's expectation as to future
financial performance. In addition to factors that may be described in the
Company's Securities and Exchange Commission filings, including this filing,
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, or on behalf of, the Company: (i) the ability of the
Debtor Companies to successfully reorganize in bankruptcy and the timing and
outcome of such bankruptcy proceedings; (ii) the ability of the Debtor
Companies to obtain an additional or new DIP loan or other financing, (iii)
continued weakness in the comic book market which cannot be overcome by the
Company's new editorial and production initiatives in comic publishing; (iv)
continued general weakness in the trading card market; (v) the failure of fan
interest in baseball to return to traditional levels that exist prior to the
1994 baseball strike thereby negatively affecting the Company's baseball card
business; (vi) the effectiveness of the Company's changes to its trading card
and publishing distribution; (vii) a decrease in the level of media exposure
or popularity of the Company's characters resulting in declining revenues
based on such characters; (viii) the lack of continued commercial success of
properties owned by major licensors which have granted the Company licenses
for its sports and entertainment trading card and sticker businesses; (ix)
unanticipated costs or delays in completing projects associated with the
Company's new ventures including media, interactive software and on-line
services and theme restaurants; (x) consumer acceptance of new product
introductions, including those for toys; and (xi) imposition of tariffs or
import quotas on toys manufactured in China as a result of a deterioration in
trade relations between the U.S. and China.

                                      26
<PAGE>


                                   PART II.
                              OTHER INFORMATION.

ITEM 1.           LEGAL PROCEEDINGS.

         The Company is a party to various legal proceedings described in
previous filings. During the quarter ended June 30, 1997 there were no
material developments in any of such proceedings not previously disclosed.
Although it is impossible to predict the outcome of any outstanding legal
proceeding, the Company believes that all legal proceedings and claims,
individually and in the aggregate, are not likely to have a material effect on
its financial condition or results of operations.

         
     On June 23, 1997, Toy Biz, Inc. ("Toy Biz"), ZIB Inc., Isaac Perlmutter 
T.A., Issac Perlmutter and Avi Arad (collectively, "Plaintiffs") filed a
complaint against Marvel Characters, Inc. ("MCI"), Marvel Entertainment
Group, Inc. ("Marvel") and Marvel Holdings Inc. ("Holdings") (collectively,
"Defendants") in the United States Bankruptcy Court for the District of
Delaware seeking declaratory and injunctive relief. The lawsuit challenges
the validity of Marvel's actions in causing its wholly owned subsidiary,
MCI, to remove and replace eight of the eleven directors of Toy Biz as of
June 20, 1997, by executing a written consent on behalf of its 7,394,000
shares of Toy Biz Class B Common Stock (the "Class B Stock"). The Class B 
Stock represents approximately 26.6% of the issued and outstanding shares of
Toy Biz common stock, and represents approximately 78% of the total voting
power of Toy Biz's common stock because it carries 10 votes per share.
In their complaint, Plaintiffs allege that a "change of control" occurred
within the meaning of the Stockholders Agreement between Toy Biz and its
principal shareholders (which includes the Plaintiffs and Marvel), dated 
as of March 2, 1995 (the "Stockholders Agreement") when Holdings removed 
Marvel's entire board of directors, including Ronald O. Perelman. 
Plaintiffs further allege that the purported change of control resulted in 
the immediate automatic conversion of MCI's Class B Common Stock to 
Class A Common Stock, which carries only one vote per share. The Company
believes that MCI had the right pursuant to the express terms of the 
Stockholders Agreement to remove and replace the members of Toy Biz's
board of directors, and that the change of control provision in the 
Stockholders Agreement is unenforceable as a result of the Company's
chapter 11 filing. Consequently, the Defendants have filed a motion to 
dismiss Plaintiffs' complaint.


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

         For information with respect to certain changes of the Company's
Board of Directors, see Exhibit 99.1 and the Company's Report on Form 8-K as
filed with the Securities and Exchange Commission (the "SEC") on June 24,
1997.


ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K.

             (A)   Exhibits

                  *  3.3   Amended and Restated By-Laws of the Registrant dated
                           as of August 13,1997

                  *  10.48 Term Loan and Guarantee Agreement dated as of August
                           5, 1997 between Panini S.p.A., Marvel Entertainment
                           Group, Inc. and The Chase Manhattan Bank, as agent.

                  *  99.1 Notice of Action by Written Consent dated June 27,
                          1997.

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

                  * Filed herewith.

             (B)  Reports on Form 8-K

                  Form 8-K as filed with the SEC on June 24, 1997 reporting
                  with respect to Item 1, Changes in Control of Registrant.

                  Form 8-K as filed with the SEC on July 14, 1997 reporting
                  with respect to Item 5, Other Events.




                                      27

<PAGE>


                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                              MARVEL ENTERTAINMENT GROUP, INC.
                                        (Registrant)





                                    By:   /s/    August J. Liguori
                                          -------------------------------------
Dated:  August 19, 1997                   August J. Liguori
                                          Vice President, Finance
                                          Chief Accounting Officer

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