SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2000

                                       OR

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

                           Commission File No. 1-13638

                            MARVEL ENTERPRISES, INC.
                   ------------------------------------------
             (Exact     name  of   Registrant   as  specified  in  its  charter)
                        (formerly known as Toy Biz, Inc.)

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


                              387 Park Avenue South
                            New York, New York 10016
                 ----------------------------------------------
          (Address of principal executive offices, including zip code)

                                 (212) 696-0808

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

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

                     Common Stock, par value $.01 per share

           Securities registered pursuant to Section 12(g) of the Act:
8% Cumulative Convertible Exchangeable Preferred Stock, par value $.01 per share
                 Plan Warrants for the purchase of Common Stock
                Class A Warrants for the purchase of Common Stock
   Class B Warrants for the purchase of 8% Cumulative Convertible Exchangeable
                                 Preferred Stock
               Class C Warrants for the purchase of Common Stock
                            12% Senior Notes due 2009

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

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

     The approximate  aggregate market value of the voting and non-voting common
equity  held by  non-affiliates  of the  Registrant  as of  March  9,  2001  was
{$27,551,462} based on a price of {$1.85) per share, the closing sales price for
the  Registrant's  Common  Stock  as  reported  in the New York  Stock  Exchange
Composite Transaction Tape on that date.

     As of March 9,  2001,  there  were  33,947,923  outstanding  shares  of the
Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

         None.


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                                TABLE OF CONTENTS

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PART I

  ITEM 1.       BUSINESS.........................................................1
  ITEM 2.       PROPERTIES......................................................10
  ITEM 3.       LEGAL PROCEEDINGS...............................................10
  ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............11

PART II

  ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                    STOCKHOLDER MATTERS.........................................12
  ITEM 6.       SELECTED FINANCIAL DATA.........................................12
  ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS.........................13
  ITEM 7 A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES
                    ABOUT MARKET RISK...........................................19
  ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................19
  ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                    ACCOUNTING AND FINANCIAL DISCLOSURE.........................19

PART III

  ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............20
  ITEM 11.      EXECUTIVE COMPENSATION..........................................23
  ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                    AND MANAGEMENT..............................................28
  ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................32

PART IV

  ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                    ON FORM 8-K.................................................32

SIGNATURES......................................................................36

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

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

     Potential inability to successfully implement business strategy.

     A decrease in the level of media exposure or popularity of our characters
     resulting in declining revenues from products based on those characters. If
     movies or  television  programs  based  upon  Marvel  characters  which are
     scheduled  to be  released  are not  successful,  the ability to obtain new
     licenses  for motion  pictures or  televisions  shows may be  substantially
     diminished.

     The lack of commercial  success of properties owned by major  entertainment
     companies that have granted us toy licenses.

     The  imposition  of quotas or  tariffs on toys  manufactured  in China as a
     result of a deterioration in trade relations  between the U.S. and China. A
     large  number of Marvel's toy products  are  manufactured  in China,  which
     subjects  us to risks of  currency  exchange  fluctuations,  transportation
     delays and  interruptions,  and  political  and economic  disruptions.  Our
     ability to obtain products from our Chinese manufacturers is dependent upon
     the United States' trade relationship with China. The "most favored nation"
     status  of  China,   which  is  reviewed  annually  by  the  United  States
     government,  is a  regular  topic  of  political  controversy.  The loss of
     China's "most favored  nation"  status would increase the cost of importing
     products  from China  significantly,  which  could have a material  adverse
     effect on us. The  imposition  of further  trade  sanctions  on China could
     result in significant supply disruptions or higher merchandise costs to us.
     We might not be able to find  alternate  sources of  manufacturing  outside
     China on acceptable terms even if we want or need to. Our inability to find
     those alternate sources could have a material adverse effect on us.

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

     Production delays or shortfalls,  continued  concentration of toy retailers
     and  pressure by certain of our major  retail  customers  to  significantly
     reduce  their toy  inventory  levels.  The  retail toy  business  is highly
     concentrated.  The five largest customers for our toy products accounted in
     the  aggregate  for  approximately  60% of our total toy sales in 2000.  An
     adverse change in, or termination of, our relationship  with one or more of
     our major customers could have a material adverse effect on us. Each of our
     five top toy  customers  also uses,  to some extent,  inventory  management
     systems  which shift a portion of  retailers'  inventory  risk onto us. Our
     production of excess  products to meet  anticipated  retailer  demand could
     result in markdowns and increased  inventory  carrying costs for us on even
     our most  popular  items.  If we fail to  anticipate  a high demand for our
     products,  however,  we face  the risk  that we may be  unable  to  provide
     adequate  supplies  of  popular  toys to  retailers  in a  timely  fashion,
     particularly during the Christmas season, and may consequently lose sales.

     The impact of competition and changes to the competitive environment on our
     products and services.

     Other factors detailed from time to time in our filings with the Securities
     and Exchange Commission.

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

                                       ii

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                                     PART I

ITEM 1.      BUSINESS

     Unless the context otherwise  requires:  (i) the term the "Company" and the
term "Marvel" each refer to Marvel Enterprises, Inc. (formerly Toy Biz, Inc.), a
Delaware corporation, and its subsidiaries; (ii) the term "MEG" refers to Marvel
Entertainment Group, Inc., a Delaware corporation,  and its subsidiaries,  prior
to the  consummation  of the Merger,  as defined  below,  and its emergence from
bankruptcy;  (iii) the term "Toy Biz,  Inc." refers to the Company  prior to the
consummation  of the  Merger;  (iv) the term  "Marvel  Licensing"  refers to the
Marvel  Licensing  business  division  of the  Company;  (v)  the  term  "Marvel
Publishing"  refers to the Marvel  Publishing  business division of the Company;
and (vi) the term  "Toy  Biz"  refers to the Toy Biz  business  division  of the
Company.  Unless  otherwise  indicated,  the  statement of  operations  data and
statement  of cash flows data  included  in this Report do not include (i) Fleer
Corp.,  Frank H. Fleer Corp. and SkyBox  International Inc. (each a wholly-owned
subsidiary of the Company), substantially all of the assets of which the Company
sold on  February  11, 1999 (the "Fleer  Sale"),  or (ii) Panini  SpA("Panini"),
which the  Company  sold on  October  5, 1999.  Certain  of the  characters  and
properties  referred to in this Report are subject to copyright and/or trademark
protection.

Background

     On October 1, 1998,  the Company  acquired MEG by means of a merger between
MEG and  the  Company's  wholly-owned  subsidiary  MEG  Acquisition  Corp.  (the
"Merger").  Upon  consummation of the Merger,  the Company changed its name from
"Toy Biz, Inc." to "Marvel Enterprises,  Inc." The Merger was part of the Fourth
Amended  Joint Plan of  Reorganization  for MEG that was confirmed by the United
States  District Court for the District of Delaware,  which had  jurisdiction of
MEG's  chapter 11 case.  MEG's  chapter 11 case had begun in December  1996 with
MEG's filing of a voluntary  petition for  bankruptcy  protection.  Prior to the
reorganization,  MEG was a  principal  stockholder  of Toy  Biz,  Inc.  See "The
Reorganization."

     In order to finance a portion of the  consideration  required to consummate
the  Merger  and  certain  other  transactions   contemplated  by  the  plan  of
reorganization,  the Company  borrowed $200 million (the "Bridge Loan") from UBS
AG, Stamford Branch ("UBS").  The Company used a portion of the proceeds from an
offering, completed on February 25, 1999 (the "Notes Offering"), of $250 million
of 12% senior notes due 2009 (the  "Notes") to repay the Bridge Loan.  UBS is an
affiliate of Warburg  Dillon Read LLC, one of the placement  agents in the Notes
Offering.

General

     The  Company  is  one  of  the  world's  most   prominent   character-based
entertainment  companies,  with a proprietary  library of over 4,700 characters.
The Company operates in the licensing,  comic book publishing and toy businesses
in both domestic and international  markets. The Company's library of characters
includes Spider-Man,  X-Men, Captain America,  Fantastic Four and The Incredible
Hulk and is one of the oldest and most recognizable collections of characters in
the entertainment industry.

     The  Company's  characters  have been  developed  through a long history of
comic book plots and storylines  which give each of them their own  personality,
context and depth. In addition, the Company's characters exist in the "Marvel

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<PAGE>


Universe,"  a  fictitious  universe  which  provides a unifying  historical  and
contextual  background for the characters and storylines.  The "Marvel Universe"
concept  permits  the  Company  to use some of its more  popular  characters  to
enhance the exposure of its lesser-known characters.

     The Company's  business is divided into three integrated and  complementary
operating divisions: Marvel Licensing, Marvel Publishing and Toy Biz.


Marvel Licensing

       Marvel  Licensing  licenses the  Company's  characters  for use in a wide
variety of consumer products, including apparel, costumes, children's sleepwear,
party  goods,  snack  foods,  video  games,  collectibles,   posters,  footwear,
backpacks  and linens.  Marvel  Licensing  also  receives  fees from the sale of
licenses  to a  variety  of  media,  including  television,  feature  films  and
destination-based entertainment.

     The  following are examples of media  exposure and licensing  opportunities
that Marvel Licensing has generated for the Company's characters:

    Television Programs

     Marvel  Licensing  licenses  the  Company's  characters  for use in popular
television programs,  including  Spider-Man,  which has appeared on the Fox Kids
Television  Network  since 1994,  and X-Men,  which has appeared on the Fox Kids
Television Network since 1992. In addition, The Incredible Hulk, Fantastic Four,
Iron Man and Silver Surfer have aired on syndicated television from time to time
in the past. In 2000,  Marvel began production of X-Men  Evolution,  a half hour
animated show. This is distributed by Warner  Brothers and currently  appears on
the Kids WB network.


    Feature Films

     Marvel  Licensing  has licensed the Company's  characters  for use in major
motion pictures.  For example, the Company currently has licenses with Twentieth
Century Fox to produce  motion  pictures  featuring  X-Men,  Fantastic  Four and
Silver  Surfer.  The X-Men film was  released  during  July 2000 and a sequel is
presently  scheduled to be released in November 2002. The Company  currently has
an  outstanding  license  with Sony  Pictures  for a motion  picture  based upon
Spider-Man which is scheduled to be released in May 2002, and other  outstanding
licenses  with various  other film studios for a number of its other  characters
and  additional  discussions  are  ongoing.  Under these  licenses,  the Company
generally  retains  control over  merchandising  rights and not less than 50% of
movie-based merchandising revenues.

    Destination-Based Entertainment

     Marvel Licensing licenses the Company's  characters for use at theme parks,
shopping malls,  special events and restaurants.  For example,  Marvel Licensing
has licensed the  Company's  characters  for use as part of an attraction at the
Universal  Studios Theme Park in Orlando,  Florida.  Universal  Studios unveiled
"Marvel  Super Hero Island"  featuring  Spider-Man,  The  Incredible  Hulk and a
number of the Company's other characters in 1999.

    On-line Media

     Marvel  Licensing  has  developed  an on-line  presence  for the  Company's
characters  through the Company's  "Marvel.com" and related websites,  including
the  introduction  of electronic  comics and access to the Company's top writers
and artists and plans to extend such presence in 2001.

    Non-Toy Merchandise

     Marvel  Licensing  licenses  the  Company's  characters  for  use in a wide
variety of consumer products, including apparel, costumes, children's sleepwear,
party  goods,  snack  foods,  video  games,  collectibles,   posters,  footwear,
backpacks and linens.


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Marvel Publishing

     Since 1995,  the comics  publishing  business has declined,  along with the
number of retailers that carry comic books.

     A  significant  number of comic  specialty  stores have left the  business,
primarily due to a decrease in speculative  purchases of both comics and related
collectibles  (e.g. trading cards.) A significant number of outlets that carried
comics as a part of their magazine merchandise programs have dropped the product
due to an overall reduction in comics readership.  Management believes that this
loss of readers was the direct result of a long-term,  industry-wide  decline in
the  readability  and quality of comic book stories.  In 2000,  the Company took
steps to improve our editorial  processes and comic book content and  management
believes  that these were the first  steps in the  long-term  rehabilitation  of
Marvel publishing.

   Comic Books

     Marvel  Publishing  has been  publishing  comic  books  since  1939 and has
developed  a roster of more  than  4,700  characters,  including  the  following
popular  characters:   Spider-Man;  X-Men  (including  Wolverine,  Nightcrawler,
Colossus, Storm, Cyclops, Rogue, Bishop and Gambit); Captain America;  Fantastic
Four (including Mr. Fantastic,  Human Torch, Invisible Woman and The Thing); The
Incredible  Hulk; Thor;  Silver Surfer;  Daredevil;  Iron Man; Dr. Strange;  and
Ghost  Rider.  The  Company's  characters  exist  in the  "Marvel  Universe",  a
fictitious   universe  which  provides  a  unifying  historical  and  contextual
background for the storylines. Marvel Publishing's titles feature classic Marvel
super heroes, newly developed Marvel characters, and characters created by other
entities and licensed to Marvel Publishing.

     Marvel  Publishing's  approach  to the  Marvel  characters  is to present a
contemporary  drama  suggestive of real people with real problems.  This enables
the characters to evolve,  remain fresh, and, therefore,  attract new and retain
old readers in each succeeding generation. The "Marvel Universe" concept permits
Marvel  Publishing to use the  popularity  of its  characters to introduce a new
character in an existing Marvel super heroes comic book or to develop more fully
an existing but lesser known  character.  In this manner,  formerly lesser known
characters  such as  Thunderbolts  and Wolverine have been developed and are now
popular  characters  in their own right and are  featured  in their own  monthly
comic books. The "Marvel  Universe" concept also allows Marvel Publishing to use
its more popular  characters to make "guest  appearances"  in the comic books of
lesser-known  or newer  characters to attempt to increase the  circulation  of a
particular issue or issues.

   Comic Book Editorial Process

     Marvel  Publishing's  full-time  editorial  staff  consists of an editor in
chief,  managing  editor and  approximately  17 editors  associate  editors  and
assistant  editors who oversee  the quality and  consistency  of the artwork and
editorial copy and manage the production  schedule of each issue. The production
of each issue  requires  the editors to  coordinate,  over a six- to  nine-month
period,  the activities of a writer, a pencil artist, an inker, a colorist and a
printer.  The  majority of this work is performed  by third  parties  outside of
Marvel Publishing's premises.

     The artists and writers  include  freelancers  who  generally are paid on a
per-page  basis.  They are eligible to receive  incentives or royalties based on
the number of copies  sold (net of  returns)  of the comic  books in which their
work appears.  In 2000,  Marvel cut back on the number of  expensive,  exclusive
agreements with writers and artists while  establishing new  relationships  with
some of the industry's hottest creators.

     The  creative  process is a team  effort led by a Marvel  editor.  A writer
develops a story line; a  pencil-artist  works with the writer to translate  the
story into a pictorial sequence of events; an inker enhances the pencil artist's
work; a letterer  typesets  balloons and captions;  and a computer artist colors
the pages. In 2000, Marvel began to eliminate the costly and inefficient process
of  hand-coloring  books in favor of higher quality,  less  expensive,  computer
coloring.  These freelance  creators and the  printers/binders  for Marvel comic
books are unaffiliated third parties.

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   Customers, Marketing and Distribution

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

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

     In 2000,  Marvel  launched the Ultimate  Marvel line,  which  recreates the
Spider-Man and X-Men mythos in a way that is thoroughly modern and accessible to
new  readers.  These books  immediately  rose to the top of the  industry  sales
charts and have been growing in monthly readership.

    For the years ended December 31, 1998,  1999 and 2000,  approximately  81%,
80%, and 77%, respectively,  of Marvel Publishing's net publishing revenues were
derived  from sales to the direct  market.  Marvel  Publishing  distributes  its
publications  through an unaffiliated  entity which, in turn, services specialty
market retailers and direct market comic book shops.

     In 2000,  Marvel returned to its historical policy of printing to order for
the Direct Market,  thus  eliminated  the cost of printing and marketing  excess
inventory. Moreover, it seems to have helped revive collector interest in Marvel
comics,  as sold out comics are now rising in after-market  value.  (It is worth
distinguishing  back-issue collectibility - which had always been a healthy part
of the comic book business - from the bubble of mass speculation on over-printed
books that marked the early 1990s.)

     For the years ended December 31, 1998, 1999 and 2000, approximately 10%, 9%
and 8%,  respectively,  of Marvel  Publishing's  net  publishing  revenues  were
derived from sales to the retail returnable market. The retail returnable market
consists of traditional  periodical  retailers  such as newsstands,  convenience
stores,  drug stores,  supermarkets,  mass  merchandise  and national  bookstore
chains. The distributors sell Marvel  Publishing's  publications to wholesalers,
who in turn  sell to the  retail  outlets.  Management  issues  credit  to these
distributors for unsold and returned copies.  Distribution to national bookstore
chains is accomplished through a separate distributor.

     For the years ended December 31, 1998, 1999 and 2000,  approximately 3%, 2%
and 2%,  respectively,  of Marvel  Publishing's  net  publishing  revenues  were
derived from subscription sales.

     For the years ended December 31, 1998, 1999 and 2000,  approximately 6%, 9%
and 13%,  respectively,  of Marvel  Publishing's  net  publishing  revenues were
derived  from  advertising  sales and other  publishing  activities.  In most of
Marvel Publishing's comic publications,  ten pages (three glossy cover pages and
seven inside  pages) are  allocated  for  advertising.  The products  advertised
include sports and entertainment trading cards, video games, role playing games,
movies, candy,  cereals,  toys, models and other consumer packaged goods. Marvel
Publishing  permits  advertisers  to  advertise  in  a  broad  range  of  Marvel
Publishing's comic book publications which target specific groups of titles that
have a younger or older readership.

Toy Biz

     Toy Biz designs,  develops,  markets and  distributes  both  innovative and
traditional  toys in the boys',  girls',  activities/games  and  electronic  toy
categories based on popular entertainment  properties,  consumer brand names and
proprietary  designs.  Toy Biz's products are distributed to a number of general
and  specialty   merchandisers   and  distributors  in  the  United  States  and
internationally.

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

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<PAGE>

     Due to the  uncertainty  of the toy  industry  and the fact that  retailers
continue to work down excess  inventories  of declining  brands,  management has
taken several  initiatives to  restructure  Toy Biz and position it for improved
financial and operating performance. These initiatives, which include previously
announced  staffing  reductions and the elimination of certain high risk product
categories  and lines and shifting  emphasis of its  business to direct  import,
will  enable  Toy  Biz to  re-deploy  its  resources  on a more  focused  set of
opportunities.  These include  traditional  Marvel-character  franchises and the
Lord of the Rings Toy  License.  Accordingly,  in the  fourth  quarter  of 2000,
Marvel  wrote  down  certain  inventories,  packaging,  tooling  and  design and
development costs related to the Toy Biz division.  The write-downs  resulted in
$22.9 million of fourth quarter adjustments and relate primarily to discontinued
toy lines in the game and promotional doll categories.

   Products

     Toy Biz has  historically  marketed a variety of toy products  designed for
children of  different  age groups.  Toy Biz's  current  product  strategy is to
increase sales of  Marvel-based  toys,  which  generate  higher margins than the
Company's  other toy product  lines.  See "Item 7.  Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations-Overview."  In 2000,
approximately  75 % of the Company's net toy sales were  generated from products
not based on the Marvel  characters.  Toy Biz produces a portion of its products
under  licenses  which it has obtained from third  parties.  In carrying out its
business strategy,  Toy Biz continuously  monitors existing licensed  properties
and pursues new  licenses  where it believes  that the new licenses fit with Toy
Biz's core product lines, or where they may add to Toy Biz's core product mix.

     Some of Toy Biz's  licenses  confer  rights to  exploit  original  concepts
developed  by toy  inventors  and  designers.  Other  licenses,  referred  to as
trademark  or brand name  licenses,  permit Toy Biz to produce  toys bearing the
recognized consumer trademark or brand name owned by the licensor. In return for
these rights Toy Biz pays royalties to its licensors.  Royalties paid by Toy Biz
to licensors and  inventors  are  typically  based on a percentage of net sales.
Most  licenses  have terms of one to three years and some are  renewable  at the
option of Toy Biz upon payment of minimum guaranteed  payments or the attainment
of certain sales levels during the term of the license.  In the future,  royalty
rates and minimum guaranteed royalty payments may increase or decrease depending
upon various competitive forces in the toy industry.

     Boys'  Products.  Toy Biz is a  leading  marketer  of  youth  entertainment
products for domestic and  international  markets.  These  products are based on
fictional action adventure  characters owned or licensed by the Company.  Action
figures and  accessories  relating  to the X-Men  motion  picture  were the most
successfully  developed of Toy Biz's action  figures and  accessory  line during
2000.  Toy Biz also produces and markets a line of toys under license from World
Championship Wrestling (WCW) and Pokemon. Toy Biz is currently developing a line
of action figures,  accessories and role play items based upon J.R.R.  Tolkien's
literary  phenomenon  "The Lord of the  Rings."  New Line  Cinema (a division of
AOL/Time  Warner) is producing the "The Lord of the Rings" for major  theatrical
release beginning December 2001 and will release Part II during Holiday 2002 and
Part III for Holiday 2003.

     Girls' Products. Toy Biz had a very successful product in the feature plush
category last year with "Puppy  Magic."  "Puppy Magic" is a soft stuffed  mother
dog and three puppies that are electronically interactive.  Toy Biz has extended
this  technology and play pattern to kittens for 2001 with the  introduction  of
"Kitty Magic.".

     Activity  Toys.  The  Company  believes  that the  Spectra  Star brand name
accounts for a substantial share of the United States mass market kite business.
Toy Biz also utilizes  license-driven  products to expand the consumer appeal of
its kite  products.  Toy Biz's kite  licenses  have been  granted by  well-known
licensors such as Disney,  Sony  Pictures,  Nickelodeon,  Universal  Studios and
Warner  Bros.  Toy Biz's  activity  toy products  also  include  model  rocketry
products.

   Design and Development

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

     Toy Biz relies on independent parties in China to manufacture a substantial
portion of its  products.  The  remainder of its products  are  manufactured  in
Mexico  or the  United  States.  As a matter  of  policy,  Toy Biz uses  several
different   manufacturers   that  compete  for  the   Company's   business.   By
concentrating its manufacturing among certain  manufacturers,  Toy Biz pursues a
strategy of selecting  manufacturers at which Toy Biz's product volume qualifies
Toy Biz as a  significant  customer.  Toy Biz is not a  party  to any  long-term
agreement with any manufacturer in the Far East.

                                       5
<PAGE>

     Toy Biz's  Spectra Star products are  manufactured  mainly in Mexico by the
Company's Mexican subsidiary.

     Toy Biz  maintains a Hong Kong office from which it regularly  monitors the
progress and performance of its manufacturers and  subcontractors.  Toy Biz also
uses Acts Testing Labs (H.K.)  Ltd.,  a leading  independent  quality-inspection
firm, to maintain close contact with its  manufacturers  and  subcontractors  in
China and to  monitor  quality  control of Toy Biz's  products.  Toy Biz uses an
affiliate  of Acts Testing  Labs (H.K.) Ltd. to provide  testing  services for a
limited amount of product currently produced in the United States.

   Customers, Marketing and Distribution

     Toy Biz  markets and  distributes  its  products  in the United  States and
internationally,  with sales to customers in the United  States  accounting  for
approximately  84%, 85% and 72% of the Company's net toy sales in 1998, 1999 and
2000, respectively.

     Outlets for Toy Biz's products in the United States  include  specialty toy
retailers, mass merchandisers,  mail order companies and variety stores, as well
as independent distributors who purchase products directly from Toy Biz and ship
them to retail outlets.  Toy Biz's five largest  customers  include Toys 'R' Us,
Inc., Wal-Mart Stores, Inc., Kmart Corporation,  Target Stores, Inc., a division
of Target Corp.,  and Kay-Bee Toy Stores,  which  accounted in the aggregate for
approximately  66%, 70% and 60% of the Company's  total toy sales in 1998,  1999
and 2000, respectively. Our customer base for toys is concentrated.

     Toy  Biz  maintains  a  sales  and  marketing  staff  and  retains  various
independent  manufacturers'  sales  representative  organizations  in the United
States.  Toy Biz's  management  coordinates  and  supervises  the efforts of its
salesmen and its other sales  representatives.  Toy Biz also directly introduces
and markets to customers  new products and  extensions  to  previously  marketed
product lines by  participating  in the major toy trade shows in New York,  Hong
Kong and Europe and through a showroom maintained by Toy Biz in New York.

     Toy Biz's products are sold outside the United States  through  independent
distributors  by the Company's Hong Kong  subsidiary,  under  supervision of Toy
Biz's  management.  Toy Biz's  international  product  line  generally  includes
products currently or previously offered in the United States,  packaged to meet
local regulatory and marketing requirements.

     Toy Biz utilizes an independent public warehouse in the Seattle, Washington
area, for storage of its products.

Intellectual Property

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

Advertising

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

     The Company currently engages Tangible Media, Inc.  ("Tangible  Media"), an
affiliate  of Isaac  Perlmutter,  to purchase  certain of its  advertising.  Mr.
Perlmutter is a director and a principal stockholder of the Company. The Company
retains  the  services  of a media  consulting  agency  for advice on matters of
advertising creativity.

                                       6

<PAGE>

Competition

     The industries in which the Company competes are highly competitive.

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

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

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


Employees

     As of December 31, 2000,  the Company  employed  approximately  720 persons
(including  operations in Hong Kong and Mexico).  The Company also contracts for
creative  work on an as-needed  basis with  approximately  500 active  freelance
writers and artists.  The Company's  employees are not subject to any collective
bargaining agreements.  Management believes that the Company's relationship with
its employees is good.

Government Regulations

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

The Reorganization

     On December 27, 1996, MEG and certain of its  subsidiaries  filed voluntary
petitions for relief under chapter 11 of the United  States  Bankruptcy  Code in
the United States  Bankruptcy Court for the District of Delaware  (collectively,
the "Bankruptcy  Case"). The Fourth Amended Plan of Reorganization  (the "Plan")
proposed by Toy Biz, Inc. and certain secured creditors of MEG in the Bankruptcy
Case was  confirmed  by the United  States  District  Court for the  District of
Delaware  (the  "District  Court"),  which  has  assumed  jurisdiction  over the
Bankruptcy Case, and in connection with that confirmation,  all appeals relating
to  consummation  of the Plan were  withdrawn  by all  parties  involved  in the
Bankruptcy Case.

     The Merger,  the Equity  Securities  Issuances,  the Secured Creditors Cash
Payment,  the  Unsecured  Creditors  Cash  Payment,  the Initial  Administration
Expense Claims Payment,  the Panini Payment,  the Panini  Guaranty,  the Dispute
Settlement  and  Professional  Fees  Payments,  the  Capital  Contribution,  the
Refinancing,  the Bridge Loan,  the  Standstill  Agreements  and the  Litigation
Trusts,  in  each  case as  described  below,  are  referred  to in this  Report
collectively as the "Reorganization."

                                       7
<PAGE>

     Pursuant to the Plan,  the Company used the proceeds  from the Bridge Loan,
together with other funds,  to consummate the following  transactions on October
1, 1998, the date of the Plan's consummation:

Merger

     Pursuant to an Agreement  and Plan of Merger,  dated as of August 12, 1998,
by  and  among  MEG,  MEG  Acquisition  Corp.,  a  Delaware  corporation  and  a
wholly-owned  subsidiary of Toy Biz, Inc.,  and Toy Biz,  Inc., MEG  Acquisition
Corp. merged with and into MEG, with MEG surviving as a wholly-owned  subsidiary
of Toy Biz, Inc.


    Equity Securities Issuances

     In  connection  with the  consummation  of the  Plan,  the  Company  issued
(collectively, the "Equity Securities Issuances"):

          (1) 16.9  million  shares of 8%  Preferred  Stock as follows:  (a) 7.9
    million shares to certain secured creditors of MEG (the "Secured Creditors")
    and (b) 9.0  million  shares to certain  purchasers  (the  "Preferred  Stock
    Investors");

          (2) 13.1 million shares of Common Stock to the Secured Creditors;

          (3) warrants to purchase up to 1.75 million  shares of Common Stock at
an exercise price of $17.25 per share (the "Plan Warrants") to certain unsecured
creditors of MEG (the "Unsecured Creditors"); and

     (4) the  following  warrants to former  stockholders  of MEG and holders of
certain class securities  litigation claims concerning MEG stock  (collectively,
the "MEG Equity Holders"),  the Unsecured  Creditors and certain other creditors
of MEG: (a) three-year  warrants to purchase 4 million shares of Common Stock at
an exercise price of $12.00 per share (the "Stockholder Series A Warrants"); (b)
six-month  warrants to  purchase 3 million  shares of 8%  Preferred  Stock at an
exercise  price of  between  $10.65  and  $11.88,  based on the date of  warrant
issuance,  per share (the  "Stockholder  Series B Warrants");  and (c) four-year
warrants to purchase 7 million  shares of Common  Stock at an exercise  price of
$18.50 per share (the  "Stockholder  Series C Warrants,"  and together  with the
Stockholder  Series  A  Warrants  and the  Stockholder  Series B  Warrants,  the
"Stockholder  Warrants";   the  Stockholder  Warrants  and  the  Plan  Warrants,
collectively,  the "Warrants"). The Stockholder Series B Warrants were issued in
three  tranches on October 14, 1998,  with an exercise price of $10.65 per share
(these  warrants  expired  on April 14,  1999);  on  December  23 1998,  with an
exercise  price of $10.86 per share (these  warrants  expired on June 23, 1999);
and on October  17,  1999,  with an  exercise  price of $11.88 per share  (these
warrants expired on April 17, 2000). The completion of all  distributions to the
Unsecured  Creditors is pending  (other than of  Stockholder  Series B Warrants)
until the District Court makes certain  determinations  concerning the amount of
the Unsecured Creditors' allowed claims.

    Secured Creditors Cash Payment

     The  Company  paid  $221.8  million in cash (the  "Secured  Creditors  Cash
Payment") to the Secured  Creditors.  An additional $10 million had been paid to
the Secured  Creditors in the second quarter of 1998 in connection with the sale
of MEG's confectionery business.

    Unsecured Creditors Cash Payment

     The Company  deposited money into a trust account that will be used to make
a cash  payment to the  Unsecured  Creditors in an amount equal to the lesser of
(i) $2.0  million  plus  fifteen  percent  (15%) of the amount of their  allowed
claims and (ii) $8.0 million  (the  "Unsecured  Creditors  Cash  Payment").  The
Unsecured Creditors Cash Payment will equal $8.0 million plus accrued interest.

    Initial Administration Expense Claims Payment

     The  Company  agreed  to pay in  cash  all  administration  expense  claims
incurred in connection  with the Bankruptcy  Case (the  "Administration  Expense
Claims").  On the consummation date of the Plan, the Company paid  approximately
$20.2 million of  Administration  Expense  Claims (the  "Initial  Administration
Expense Claims Payment"). In December 1998 and during 1999 and 2000, the Company
paid approximately $4.2 million,  $10.4 million and $2.1 million,  respectively,
of additional  Administration  Expense Claims. The Company estimates that it may
be  required  to pay  between  $6.5  million  and  $8.5  million  of  additional

                                       8

<PAGE>

Administrative  Expense  Claims,  although  there can be no  assurance as to the
amount  the  Company  will  be  required  to pay.  If the  aggregate  amount  of
Administration  Expense Claims is in excess of $35 million, Zib Inc. ("Zib"), an
affiliate of Mr.  Perlmutter,  has agreed that Zib or one of its affiliates will
lend the Company the amount of the excess in exchange for a five-year promissory
note from the Company (the "Excess  Administration  Expense  Claims Note") which
would bear interest at 2% above the interest rate on the Notes.

    Panini Payment and Panini Guaranty

     The Company  paid $13  million in cash (the  "Panini  Payment")  to certain
creditors (the "Panini  Creditors") of Panini and issued to the Panini Creditors
a deficiency  guaranty (the "Panini  Guaranty") of up to $27 million of Panini`s
United States bank indebtedness.  On October 5, 1999, the Company sold Panini to
ID4 Holding  S.p.A.  ("ID4"),  a newly created  company owned jointly by Fineldo
S.p.A.,  an  Italian  conglomerate  engaged  in  various  consumer  product  and
financing  businesses  and  controlled  by  Vittorio  Merloni,  and  the  Senior
Management of Panini.  In connection  with ID4's  purchase of the Panini equity,
for which the  Company  received  a nominal  price,  ID4 also  purchased  all of
Panini's outstanding U.S. bank debt and the Company was released from the Panini
Guaranty.  The Company  made a cash  payment of $11.2  million to Panini's  bank
lenders to obtain its release from the Panini Guaranty. As part of the sale, the
Company  also entered into an  agreement  whereby  Panini would  continue as the
Company's international publishing licensee under a five-year license.

 Dispute Settlement and Professional Fees Payments

     The Company paid $3.5 million in cash (the "Dispute Settlement Payment") to
certain claimants in the Bankruptcy Case in settlement of disputes.  The Company
also paid $200,000 (the  "Professional Fees Payment") to Dickstein Partners Inc.
in reimbursement  of professional  fees incurred in connection with the purchase
of shares of 8% Preferred Stock on October 1, 1998.  Dickstein  Partners Inc. is
an affiliate of Mark  Dickstein,  who was a director of the Company from October
1998 until October 1999.

    Capital Contribution

     The Company  received a capital  contribution  totaling  $1.5  million (the
"Capital  Contribution")  from an affiliate of Mr. Perlmutter and from Avi Arad.
Mr. Arad is a director,  executive  officer,  and principal  stockholder  of the
Company.

    Refinancing

     The Company repaid all outstanding  indebtedness (the "Refinancing")  under
Toy Biz, Inc.'s then-existing working capital facility.

    Bridge Loan

     The Company  obtained  the Bridge Loan from UBS. A portion of the  proceeds
from the Notes Offering were used to repay the Bridge Loan.

    Standstill Agreements

     Carl C. Icahn and High River Limited  Partnership  (the "High River Group")
and Vincent  Intrieri and Westgate  International  L.P. (the  "Westgate  Group")
entered  into  standstill  agreements  (the  "Standstill   Agreements")  on  the
consummation date of the Plan. Pursuant to the Standstill  Agreements,  the High
River Group and the Westgate Group have each agreed that they will not, and will
not permit  their  affiliates  or  associates  to, among other  things,  seek to
control the management of the Company.  In addition,  the Standstill  Agreements
require  that the High  River  Group  and  Westgate  Group  vote all  securities
beneficially  owned by them in  connection  with any  action  to be taken by the
Company's  security  holders with respect to which an  abstention  will have the
same effect as a vote against the matter,  in  proportion to the votes cast with
respect to that action by all other holders of  securities.  With respect to all
other matters to be voted upon at a meeting of the Company's  security  holders,
the High River Group and  Westgate  Group shall  cause  securities  beneficially
owned by them to be present at the  meeting for quorum  purposes  but to abstain
from voting on the matter.  The Standstill  Agreements will terminate on October
1, 2002, subject to earlier termination under certain circumstances.

                                       9
<PAGE>

    Litigation Trusts

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

ITEM 2. PROPERTIES

     The Company has the following principal properties:
<TABLE>
<CAPTION>


Facility                   Location                           Square Feet               Owned/Leased
--------                   ---------                          -----------               ------------
<S>                        <C>                                <C>                       <C>
Office                     New York, New York                   69,000                  Leased
Office                     New York, New York                   15,000                  Leased
Office/Showroom            New York, New York                   14,100                  Leased
Office/Warehouse           Yuma, Arizona                        80,000                  Owned
Warehouse                  Fife, Washington                    210,000                  Leased
Manufacturing              San Luis, Mexico                    190,000                  Owned
Office                     Santa Monica, California              2,800                  Leased
</TABLE>


ITEM 3.               LEGAL PROCEEDINGS

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

     Spider-Man   Litigation.   The  Company's   subsidiaries   MEG  and  Marvel
Characters,  Inc.,  (collectively,  the "Marvel Parties") have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion picture based on the Spider-Man character which was completely settled in
March 2001.


         Wolfman v. New Line Cinema Corp.  et al. On August 20, 1998,  Marvin A.
Wolfman  commenced an action in the United States District Court for the Central
District  of  California  against  New  Line  Cinema  Corporation,  Time  Warner
Companies,  Inc.,  the  Company,  MEG and its wholly  owned  subsidiary,  Marvel
Characters,  Inc.,  and others.  The complaint  alleges that the motion  picture
Blade,  produced and  distributed by New Line pursuant to an agreement with MEG,
as well as the Company's sale of related action figure toys, infringes Wolfman's
claimed  copyrights  and  trademarks  as  the  author  of the  original  stories
featuring the Blade and Deacon Frost characters  (collectively,  the "Work") and
that Wolfman created the Work as an independent  contractor  engaged by MEG. The
relief  sought by complaint  includes a  declaration  that the  defendants  have
infringed Wolfman's copyrights, compensatory and punitive damages, an injunction
and various  other forms of equitable  relief.  The Company  believes  that each
component  of the Work was  created  for MEG as a "work  for  hire"  within  the
meaning of the applicable  copyright  statute and believes that all of Wolfman's
claims are  without  merit and  intends to defend the action  vigorously  if the
action is allowed to proceed.

                                       10
<PAGE>

         On  February  24,  1999,   Wolfman  and  the  Company  entered  into  a
stipulation  pursuant to which the United States District Court for the District
of Delaware will  determine the issue of whether  Wolfman or Marvel  Characters,
Inc.  (which is now a wholly  owned  subsidiary  of the Company) is the rightful
owner of Blade and Deacon Frost and a number of other characters. In the context
of this proceeding, the Company has sought a declaration that Marvel Characters,
Inc., not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial
on the merits was held in December 1999 and on November 6, 2000 the judge issued
an  opinion  and order  finding in favor of the  Company  and  holding  that the
Company is the lawful owner of the rights  claimed by Wolfman.  As of this date,
Wolfman filed an appeal which has not been scheduled.

         Marvel v. Simon.  In December  1999,  Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective  December 7, 2001  alleged  transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000,  the Company  commenced an action  against  Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the  Captain  America  character  was created by Simon and others as a "work for
hire" within the meaning of the applicable  copyright statute and that Simon had
acknowledged  this fact in  connection  with the  settlement  of previous  suits
against the Company's  predecessors  in 1969. The suit seeks a declaration  that
Marvel  Characters,  Inc.,  not Mr. Simon,  is the rightful owner of the Captain
America character.

         Administration  Expense  Claims  Litigation.  The Company has initiated
litigation  contesting  the  amount of  certain  Administration  Expense  Claims
submitted to the Company for payment.  While the amounts claimed are material to
the  Company's  financial  position,  the  Company  believes  that the  ultimate
resolution  of these  matters  will not be material to the  Company's  financial
condition,  results  of  operations  or cash  flows,  although  there  can be no
assurances.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 2000.

                                       11


<PAGE>


                                     PART II

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

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

<TABLE>
<CAPTION>

         Fiscal Year                                 High            Low
         -----------                                 ----            -----
         <S>                                         <C>             <C>
         1999

         First Quarter                               $ 7             $ 5 3/8
         Second Quarter                              $ 9 3/4         $ 6 5/8
         Third Quarter                               $ 7 1/2         $ 5 1/8
         Fourth Quarter                              $ 7 7/8         $ 4 11/16


         2000
         First Quarter                               $ 6 1/2         $ 5 5/16
         Second Quarter                              $ 6 15/16       $ 4 3/16
         Third Quarter                               $ 7 3/8         $ 3 1/8
         Fourth Quarter                              $ 3 3/16        $ 1 7/16

</TABLE>

     As of March 21,  2001,  there were 614  holders of record of the  Company's
Common Stock.

     The Company has not declared any dividends on the Common Stock. The working
capital facility  restricts the Company's ability to pay dividends on the Common
Stock. See "Item 7. Management's  Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."

                         ITEM 6. SELECTED FINANCIAL DATA

     The following table presents  selected  combined or consolidated  financial
data, derived from the Company's audited financial statements, for the five-year
period ended December 31, 2000.  The selected  financial data of the Company for
the years ended  December 31, 1998 and 1999 are not  comparable to prior periods
due to the Company's  acquisition of MEG on October 1, 1998. The Company has not
paid dividends on its capital stock during any of the periods presented below.

<TABLE>
<CAPTION>

                                                                Year Ended
                                  -------------------------------------------------------------------------

                                  Dec. 31,      Dec. 31,          Dec.31,          Dec.31,         Dec.31,
                                   1996          1997              1998             1999            2000
                                  ---------     ---------         --------         --------        --------
                                                     (in thousands, except per share amounts)

Statement of Operations
      Data:
<S>                               <C>           <C>                <C>              <C>             <C>
Net sales.....................    $ 221,624     $ 150,812          $232,076         $319,645        $231,651
Operating income (loss).......       27,215       (49,288)          (19,460)              56         (58,990)
Net income (loss) ............       16,687       (29,465)          (32,610)         (33,791)        (89,858)
Basic and diluted net income
    (loss) per common share...         0.61         (1.06)            (1.23)           (1.43)          (3.13)
Preferred dividend requirement          105            71             3,380           14,220          15,395

At December 31:
Balance Sheet Data:
Working capital (deficit).....      102,192        74,047          (133,392)          91,919          41,740
Total assets..................      171,732       150,906           689,904          654,637         555,284
Borrowings....................         --          12,000           200,000             --              --
Other non-current debt........         --            --              27,000          250,000         250,000
Redeemable preferred stock....        1,681          --             172,380          186,790         202,185
Stockholders' equity..........      137,455       107,981           183,624          135,763          31,396

</TABLE>

                                       12

<PAGE>

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

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

     Set forth below is a discussion of the  financial  condition and results of
operations  of the Company for the three fiscal  years ended  December 31, 2000.
Because of the significant effect of the Reorganization on the Company's results
of   operations,   the   Company's   historical   results  of   operations   and
period-to-period comparisons will not be indicative of future results.

Overview

    Net Sales

     The  Company's  net sales  are  generated  from (i)  licensing  the  Marvel
characters  for  use  in  merchandise,  promotions,  feature  films,  television
programs,  theme parks and various  other areas;  (ii)  publishing  comic books,
including  related  advertising  revenues;  and (iii) marketing and distributing
toys,  including toys based on the Marvel  characters,  proprietary toy products
and toys  based on  properties  licensed  to the  Company  from  third  parties.
Licensing, publishing and toys have accounted for 8%, 20% and 72%, respectively,
of the Company's net sales for the year ended December 31, 2000.

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

          Due to the deteriorating financial performance of Toy Biz, the Company
has eliminated  certain  product  categories and lines in an effort to focus its
future toy  business  on  marketing  and  distributing  toys based on the Marvel
characters,  which  provide the Company with higher  margins  because no license
fees are required to be paid to third  parties and,  because of media  exposure,
require less  promotion and  advertising  support than the  Company's  other toy
categories.  In 2001,  Toy Biz will  substantially  reduce its  advertising  and
promotion  costs as compared to 1999 and 2000 when  approximately  $37.8 million
and  approximately  $35.3 million,  respectively,  were spent on these costs. In
addition,  Toy Biz will market and distribute  toys  associated with Lord of the
Rings Toy License  which will  coincide  with the releases of all three films in
the trilogy  presently  scheduled  to be released in December of 2001,  2002 and
2003.

     The Company records as revenue the present value of licensing fees from its
licensing  activities at the time the Company's  characters are available to the
licensee and the collection of licensing fees is reasonably  assured.  Licensing
fees  booked as  revenue  but not yet  realized  are  recorded  as  receivables.
Licensing  receivables  due more than one year beyond the balance sheet date are
discounted to their net present value and are recorded as deferred charges.

   Operating Expenses: Cost of Sales

     There generally is no material cost of sales  associated with the licensing
of the Company's characters.

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

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

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

                                       13

<PAGE>


     In connection with the  restructuring of Toy Biz, the Company increased its
inventory  reserve  by an  additional  $3.8  million  by  writing  down  certain
inventories in the fourth quarter of 2000 related to  discontinued  toy lines in
the game and promotional dolls categories.

   Operating Expenses: Selling, General and Administrative

     Selling, general and administrative costs consist primarily of advertising,
royalties, general and administrative,  warehousing and store merchandising. The
most  significant  portion  of  selling,  general  and  administrative  costs is
advertising and royalties.

     Advertising expense varies with the Company's product mix.

     Royalties  are  payable on toys  based on  characters  licensed  from third
parties,  such as  World  Championship  Wrestling,  Universal  Studios  and Sony
Pictures,  as well as toys developed by outside inventors.  There are no royalty
payments for Marvel-character-based toy products. Reserves for unpaid guaranteed
royalties on discontinued toy lines were increased by an additional $0.8 million
during the fourth quarter of 2000.

     General  and  administrative   costs  consist  of  salaries  and  corporate
overhead.

     The Company expects warehousing and store merchandising costs to be reduced
over time with the elimination of certain product categories and lines.

   Operating Expenses: Depreciation and Amortization

     Depreciation and amortization  expense consists of amortization of goodwill
and other intangibles, tooling, product design and development, packaging design
and depreciation  expense.  Amortization  expense  increased  significantly as a
result of the goodwill  created pursuant to the combination of Toy Biz, Inc. and
MEG, which is amortized over an assumed 20-year life.

     Tooling and product design and  development  and packaging  design expense,
which are attributable to the toy business, are normally amortized over the life
of the respective  product.  However, in the fourth quarter of 2000, the Company
wrote down its tooling,  product  design and  development  and packaging  design
costs by an  additional  $16.8  million  in  excess of  normal  amortization  in
connection with the discontinuance of certain product categories and lines.

Results of Operations of the Company

    Year ended December 31, 2000 compared with year ended December 31, 1999

     The Company's net revenue decreased  approximately  $88.0 million to $231.6
million for the year ended  December  31,  2000 from $319.6  million in the 1999
period.  The decrease in net revenue was mainly due to a reduction in toy sales,
specifically  WCW products and Dolls such as Kindergarden  Babies and Miss Party
Surprise  which was  partially  offset by increased  sales of Activity  Toys and
Marvel  products  relating to the X-Men motion  picture.  Toy sales were further
reduced  by $1.5  million  for  additional  returns  and  allowances  related to
discontinued  product  categories  and lines.  Licensing  revenue  decreased  by
approximately  $11.7  million in 2000 from 1999  primarily  due to a substantial
license payment received in 1999 from Sony Pictures  Entertainment in return for
the  rights  to  produce a motion  picture  based on the  Spider-Man  character.
Publishing  revenue  increased by  approximately  $2.2 million  primarily due to
increased advertising and custom comics relating to the X-Men motion picture.

     Gross profit  decreased  approximately  $65.7 million to $103.1  million in
2000 from $168.8  million in 1999.  The  reduction  in toy and  licensing  gross
profit  accounted  for  approximately  $58.1  million  and  approximately  $11.7
million, respectively, of the decrease which was partially offset by an increase
in Publishing gross profit of $4.1 million.  Gross Profit as a percentage of net
sales decreased to approximately 45% in 2000 from approximately 53% in 1999. The
licensing  and  publishing  divisions  produced  gross  margins  of 97% and 51%,
respectively.  The gross profit margin for the Toy Biz division decreased to 37%
in 2000 from 49% in 1999 due  primarily to a higher  percentage  of WCW and Girl
products  sold during 1999 which  generally  have higher gross  profit  margins.
Fourth  quarter  adjustments  totaling  $3.8 million  relating to the  Company's
writedown of certain inventories added to a higher cost of sales component and a
lower gross margin in 2000.

     Selling,  general and administrative expense decreased  approximately $17.1
million  to  $107.5  million  in 2000  from  $124.6  million  in  1999.  Expense
reductions in the toy and corporate  divisions accounted for approximately $14.1
million and approximately $6.7 million,  respectively, of the decrease primarily
due to lower  advertising,  royalty,  payroll and  professional  fees.  Selling,
general and  administrative  expense as a percentage  of net sales  increased to
approximately  46% in  2000  from  approximately  39% in  1999  mainly  due to a
reduction in toy sales,  development  costs for The Avengers and X-Men Evolution
animated  television  series in  addition  to  one-time  start-up  costs for the
Marvel.com website.

                                       14

<PAGE>


     Depreciation and amortization expense increased approximately $12.6 million
to $30.7 million in 2000 from $18.1 million in 1999  primarily due to additional
amortization expense of $16.8 million recorded in the fourth quarter of 2000 for
accelerated write-offs of tooling,  product design and development and packaging
design related to discontinued toy products.  This was partially offset by lower
amortization of $4.2 million due to reduced capital expenditures in 2000.

     Amortization of goodwill and other intangibles decreased approximately $1.8
million to $24.0  million in 2000 from $25.9  million in 1999.  The decrease was
mainly due to the  completion of the purchase price  allocation  relating to the
acquisition  of MEG  which  resulted  in a net  decrease  in  goodwill  of $21.7
million in 1999.

     Interest expense decreased  approximately  $0.2 million to $31.9 million in
2000 from $32.1  million  in 1999,  primarily  due to a  reduction  in  deferred
financing charges.

     As a result of the above,  the Company reported a net loss of $89.9 million
in 2000 compared to a net loss of $33.8 million in 1998. The Company  reported a
loss per share after preferred dividends of $3.13 in 2000 compared to a loss per
share after preferred dividends of $1.43 in 1999.

   Year ended December 31, 1999 compared with year ended December 31, 1998

The Company's net sales  increased to $319.6 million for the year ended December
31, 1999 from $232.1  million in the 1998 period.  The increase in net sales was
partially  due to the  inclusion of twelve  months of licensing  and  publishing
revenues  in 1999,  while only three  months of activity  was  included in 1998,
accounting  for an increase of  approximately  $25.9  million and  approximately
$28.3 million in licensing and publishing revenues,  respectively. Toy Biz sales
increased by  approximately  $33.3  million in 1999 from 1998  primarily  due to
sales of WCW action  figures,  a product  line that was  introduced  in 1999 and
increased sales of large and small dolls,  partially  offset by a decline in the
sales of Marvel-related product.

     Gross profit increased $64.7 million to $168.8 million for 1999 from $104.1
million in 1998.  The inclusion of the licensing  and  publishing  divisions for
twelve months in 1999,  while included for only three months in 1998,  accounted
for approximately $25.7 million and approximately  $11.9 million,  respectively,
of the  increase  while  gross  profit  from  the  Toy  Biz  division  increased
approximately $27.1 million. Gross Profit as a percentage of net sales increased
to approximately  53% in 1999 from  approximately 45% in 1998. The licensing and
publishing  divisions produced gross margins of 98% and 44%,  respectively.  The
gross profit  margin for the Toy Biz division  increased to 49% in 1999 from 44%
in 1998 due  primarily to a higher  percentage  of  promotional  products,  that
generally  have  higher  gross  profit  margins,  sold  during  1999 and various
one-time sales adjustments relating to the Company's acquisition of MEG recorded
in 1998.

     Selling,  general and  administrative  expense  increased  $27.5 million to
$124.6  million  in 1999  from  $97.1  million  in 1998.  Selling,  general  and
administrative  expense as a percentage of net sales decreased to  approximately
39%  in  1999  from  approximately  42%  in  1998.  The  selling,   general  and
administrative  expenses for the licensing,  publishing and corporate  divisions
increased approximately $29.5 million to $35.1 million from $5.6 million in 1998
due to the inclusion of the full-year's activity in 1999.

     The Toy Biz division produced a net decrease of approximately  $2.0 million
to $89.5  million in 1999 from $91.5 million in 1998;  however,  the 1998 period
included  $11.7  million of  expenses  relating  to the  termination  of license
agreements  resulting from the Company's  integration of MEG's  operations which
did not recur in 1999.  Discounting the one-time  charges from 1998, the Toy Biz
division  accounted for an increase of approximately  $9.7 million primarily due
to increased  advertising  and royalty  expenses  related to increased  sales of
promotional items in 1999.

     Depreciation  and  amortization  expense  decreased  $1.2  million to $18.1
million  in  1999  from  $19.3  million  in  1998  primarily  due to  additional
amortization   expense   recorded  in  1998  related  to  early   write-offs  of
discontinued  toy  products  based  on  Marvel  characters  as a  result  of the
Bankruptcy Case.

                                       16

<PAGE>


     Amortization of goodwill and other  intangibles  increased $18.8 million to
$25.9  million in 1999 from $7.1  million in 1998.  The  increase was due to the
amortization of goodwill  created  pursuant to the MEG acquisition  completed on
October 1, 1998.

     Interest expense increased $22.7 million to $32.1 million in 1999 from $9.4
million in 1998,  primarily due to $25.4 million in interest on the Senior Notes
in 1999,  offset by a reduction in interest  expense  related to the Bridge Loan
from 1998 to 1999.

     As a result of the above,  the Company reported a net loss of $33.8 million
in 1999 compared to a net loss of $32.6 million in 1998. The Company  reported a
loss per share after preferred dividends of $1.43 in 1999 compared to a loss per
share after preferred dividends of $1.23 in 1998

Liquidity and Capital Resources

     The Company's primary sources of liquidity are cash on hand, cash flow from
operations and cash available from the $40.0 million  Citibank  working  capital
facility,  which was reduced  $20.0  million in 2000 from $60.0 million in 1999.
The Company  anticipates  that its primary needs for  liquidity  will be to: (i)
conduct its business;  (ii) meet debt service  requirements;  (iii) make capital
expenditures; and (iv) pay Administration Expense Claims.

     Net cash provided by (used in) the Company's operations during fiscal 1998,
1999 and 2000 was $42.0 million, $0.8 million and ($24.2) million, respectively.

     At December 31, 2000, the Company had working capital of $41.7 million.

     On October 1, 1998,  the Company  obtained  the Bridge  Loan from UBS.  The
Company  used a portion of the  proceeds  from the Notes  Offering  to repay the
Bridge Loan on February 25, 1999.

     On October 1, 1998,  the Company and UBS entered into a $50 million  credit
facility.  There were no  borrowings  under  that  credit  facility,  and it was
terminated on February 25, 1999.

     On February 25, 1999, the Company  completed a $250.0  million  offering of
senior  notes  (the  "Senior  Notes")  in  a  private   placement   exempt  from
registration  under the Securities Act of 1933 ("the Act") pursuant to Rule 144A
under the Act. Net proceeds of approximately $239.0 million were used to pay all
outstanding  balances  under the Bridge  Facility and for working  capital.  The
Senior  Notes are due June 15,  2009 and bear  interest  at 12% per  annum.  The
Senior Notes may be redeemed  beginning June 15, 2004 for a redemption  price of
106% of the  principal  amount,  plus accrued  interest.  The  redemption  price
decreases 2% each year after 2004 and will be 100% of the principal amount, plus
accrued  interest,  beginning on June 15, 2007.  In addition,  35% of the Senior
Notes may, under certain circumstances, be redeemed before June 15, 2002 at 112%
of the principal amount,  plus accrued  interest.  Principal and interest on the
Senior Notes are  guaranteed  on a senior basis jointly and severally by each of
the Company's domestic  subsidiaries.  On August 20, 1999, the Company completed
an exchange  offer under which it exchanged  virtually  all of the Senior Notes,
which  contained  restrictions  on transfer,  for an equal  principal  amount of
registered,  transferable  notes whose terms are identical in all other material
respects to the terms of the Senior Notes.

         In  February  1999,  in  connection  with the  repayment  of the Bridge
Facility and the termination of the UBS Credit Facility, the Company recorded an
extraordinary  charge of approximately $1.5 million,  net of tax benefit for the
write-off of deferred financing costs associated with these two facilities.

     On April 1, 1999, the Company and Citibank,  N.A.  ("Citibank")  entered an
agreement  for a $60.0  million  Revolving  Credit  Facility  ("Citibank  Credit
Facility").  The Citibank  Credit  Facility  bears interest at either the bank's
base rate  (defined as the higher of the prime rate or the sum of 1/2 of 1% plus
the Federal Funds Rate) plus a margin  ranging from 0.75% to 1.25%  depending on
the Company's  financial  performance  or at the  Eurodollar  rate plus a margin
ranging from 2.25% to 2.75%  depending on the Company's  financial  performance.
The Citibank  Credit  Facility  requires the Company to pay a commitment  fee of


                                       17

<PAGE>


0.625% per annum on the average  daily  unused  portion of the  facility  unless
there is at least $20.0 million outstanding borrowings in which case the rate is
0.50% per annum for the amount  outstanding above $20.0 million.  In March 2000,
the parties  agreed to an amendment  whereby  financial  covenants  would not be
tested as long as the total amount outstanding does not exceed $20.0 million and
the borrowing base less the total outstanding  amount exceeds $20.0 million.  In
April 2000, the parties agreed to reduce the Citibank  Credit  Facility to $40.0
million.  In August 2000, the parties agreed to an amendment  whereby  financial
covenants would not be tested as long as the total amount  outstanding  does not
exceed $20.0 million and the borrowing  base less the total  outstanding  amount
exceeds $10.0 million during June, July and August 2000 and $20.0 million at all
other times.  In addition,  the  amendment  requires the  re-negotiation  of the
financial  covenants once financial  projections are provided to the Lender. The
Company  has not  borrowed  under  the  Citibank  Credit  Facility.  The  amount
available  under  this  facility  is  reduced by the amount of letters of credit
outstanding,  which is  approximately  $15.4  million as of March 1,  2001.  The
Citibank Credit Facility is secured by a lien on all of the Company's  inventory
and receivables.

     On October 1, 1998,  the Company  sold 9.0 million  shares of 8%  Preferred
Stock at $10 per share for an aggregate of $90.0 million. The 8% Preferred Stock
pays  quarterly  dividends  on a cumulative  basis on the first  business day of
January,  April,  July and  October  in each year,  commencing  January 4, 1999.
Dividends are payable, at the option of the Board, in cash, in additional shares
of 8% Preferred Stock or in any combination  thereof.  The Company is restricted
under the Indenture and under the Citibank  Credit Facility from making dividend
payments on the 8% Preferred  Stock except in additional  shares of 8% Preferred
Stock.  Each share of 8% Preferred Stock may be converted,  at the option of its
holder,  into  1.039  shares  of Common  Stock.  The  Company  must  redeem  all
outstanding shares of 8% Preferred Stock on October 1, 2011.

     On the  consummation  date  of the  Plan,  the  Company  made  the  Initial
Administration  Expense Claims  Payment of $20.2 million.  In December 1998, the
Company paid  approximately  $4.2 million of additional  Administration  Expense
Claims and paid an additional  $10.4 million and $2.1 million of  Administration
Expense Claims during 1999 and 2000, respectively. The Company estimates that it
may be required  to pay between  $6.5  million  and $8.5  million of  additional
Administration  Expense  Claims,  although  there can be no  assurance as to the
amount the Company will be required to pay.

     The Company will be required to make the Unsecured  Creditors  Cash Payment
at such time as the amount  thereof is  determined.  The  Company  deposited  $8
million  into a trust  account to satisfy  the maximum  amount of such  payment.
During  2000,  the Company  received  approximately  $1.9 million from the trust
account  as a result of a  settlement  with the NBA.  The  balance  in the trust
account as of December 31, 2000 is approximately $7.0 million.

     Capital expenditures (excluding  acquisitions) by the Company during fiscal
1998, 1999 and 2000 were  approximately  $17.3 million,  $21.0 million and $15.1
million, respectively.

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

Seasonality

     The Company's annual operating  performance  depends, in large part, on its
sales of toys during the relatively brief Christmas selling season. During 1998,
1999 and 2000,  60%, 62% and 62%,  respectively,  of the Company's net toy sales
were realized  during the second half of the year.  Management  expects that the
Company's  toy  business  will  continue to  experience a  significant  seasonal
pattern for the foreseeable future.  This seasonal pattern requires  significant
use of working capital mainly to build inventory  during the year,  prior to the
Christmas selling season,  and requires  accurate  forecasting of demand for the
Company's products during the Christmas selling season.

                                       18

<PAGE>


ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     Market risks  related to the Company's  operations  result  primarily  from
changes in interest rates. At December 31, 2000, all of the Company's  long-term
debt  bore  interest  at a  fixed  rate,  and all of the  Company's  outstanding
preferred stock earns dividends at a fixed rate. However,  the fair market value
of the fixed  rate debt and the  outstanding  preferred  stock is  sensitive  to
changes in  interest  rates.  The Company is subject to the risk that the market
interest  rates will decline and the interest  rates for the fixed rate debt and
the fixed dividend yield on the outstanding preferred stock will exceed the then
prevailing  market  rates.  Under its current  policies,  the  Company  does not
utilize  any  interest  rate  derivative  instruments  to  manage  its  exposure
to interest rate changes.

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  financial  statements  required  by  this  item,  the  report  of  the
independent  auditors  thereon  and the  related  financial  statement  schedule
required  by Item  14(a)(2)  appear on pages F-2 to F-33.  See the  accompanying
Index to Financial  Statements and Financial Statement Schedule on page F-1. The
supplementary  financial  data required by Item 302 of Regulation S-K appears in
Note 11 to the December 31, 2000 Consolidated Financial Statements.

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

Not applicable.



                                       19

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

     The  following  table  sets  forth the name,  age (as of March 1, 2001) and
position  of each person who serves as an  executive  officer or director of the
Company:

Name                       Age   Position

Morton E. Handel.........   65   Chairman of the Board of Directors
Avi Arad.................   53   Director and Chief Creative Officer; President
                                   and Chief Executive Officer of Marvel Studios
F.. Peter Cuneo..........   57   President, Chief Executive Officer and Director
Sid Ganis................   61   Director
Shelley F.Greenhaus......   47   Director
James F. Halpin..........   50   Director
Lawrence Mittman.........   50   Director
Isaac Perlmutter.........   58   Director
Rod Perth................   57   Director
Michael J. Petrick.......   39   Director
Alan Fine................   50   President and Chief Executive Officer
                                   of Toy Biz
William Jemas............   43   President of Publishing and Consumer Products
Allen S. Lipson..........   58   Executive Vice President, Business and
                                   Legal Affairs and Secretary
Richard Ungar............   50   President of Marvel Characters Group


Directors

     The  name,  principal   occupation  for  the  last  five  years,   selected
biographical  information  and period of service as a director of the Company of
each director are set forth below.

     Morton E.  Handel has been the  Chairman of the Board of  Directors  of the
Company  since  October  1998 and was first  appointed as a director of Toy Biz,
Inc. in June 1997.  Mr. Handel is also the President of S&H  Consulting  Ltd., a
financial  consulting  group.  Mr. Handel has held that position since 1990. Mr.
Handel  has  also  held  the  position  of  Director  and  President  of  Ranger
Industries, Inc. from July 1997 until February 2001. Mr. Handel also serves as a
director of Concurrent  Computer  Corp., a director of Linens N Things since May
2000 and was previously  Chairman of the Board of Directors and Chief  Executive
Officer of Coleco Industries, Inc.

     Avi Arad has  been  the  Chief  Creative  Officer  of the  Company  and the
President and Chief Executive  Officer of the Company's  Marvel Studios Division
(which  is  responsible   for  motion  picture  and  television   licensing  and
development)  since  October  1998.  Mr. Arad has been a Director of the Company
since April 1993.  From April 1993 through  September 1998, Mr. Arad served as a
consultant  to Toy Biz,  Inc.  Mr. Arad was the  President  and Chief  Executive
Officer of New World Animation,  a media production company under common control
with MEG, from April 1993 until  February 1997 and held the same position at the
Marvel  Studios  division of MEG from February 1997 until  November 1997. At New
World  Animation  and MEG's  Marvel  Studios  division,  Mr.  Arad served as the
Executive Producer of the X-Men and the Spider-Man  animated TV series. Mr. Arad
has been a toy  inventor  and  designer  for more  than 20 years  for  major toy
companies  including  Mattel Inc.,  Hasbro,  Inc. and Tyco Toys, Inc. During his
career, Mr. Arad has designed or codesigned more than 160 toys. Mr. Arad is also
the owner of Avi Arad & Associates  ("Arad  Associates"),  a firm engaged in the
design and development of toys and the production and distribution of television
programs.

                                       20

<PAGE>


     F. Peter Cuneo has served as the Company's  President  and Chief  Executive
Officer since July 1999.  From  September 1998 to July 1999, Mr. Cuneo served as
Managing  Director of Cortec Group Inc., a private  equity fund.  From  February
1997 to September 1998, Mr. Cuneo was Chairman of Cuneo & Co., L.L.C., a private
investment firm. From May 1996 to February 1997, Mr. Cuneo was President,  Chief
Executive  Officer and a Director  of  Remington  Products  Company,  L.L.C.,  a
manufacturer  and  marketer of personal  care  appliances;  from May 1993 to May
1996, he was President and Chief Operating Officer at Remington.

     Sid Ganis has been a Director of the Company since October 1999.  Mr. Ganis
is President of Out of the Blue  Entertainment,  a provider of motion  pictures,
television and musical entertainment for Sony Pictures  Entertainment and others
which he founded,  since September 1996. From January 1991 until September 1996,
Mr Ganis held various  executive  positions with Sony  Picutres,  including Vice
Chairman  of  Columbia  Pictures  and  President  of  Worldwide   Marketing  for
Columbia/TriStar Motion Picture Companies.

     Shelley F. Greenhaus has been a Director of the Company since October 1998.
Mr.  Greenhaus  has been the  President  and Managing  Director of  Whippoorwill
Associates, Inc. ("Whippoorwill"), an investment advisor which he founded, since
1990.  Whippoorwill  manages  investment  accounts  for  a  prominent  group  of
institutional and individual investors from around the world.

     James F. Halpin has been a Director of the  Company  since March 1995.  Mr.
Halpin retired in March 2000 as President, Chief Executive and Operating Officer
and a director  of CompUSA  Inc.,  a retailer of  computer  hardware,  software,
accessories  and related  products,  which he had been with since May 1993.  Mr.
Halpin is also a director of both  Interphase  Corporation,  a  manufacturer  of
high-performance networking equipment for computers, and Lowe's Companies, Inc.,
a chain of home improvement stores.

     Lawrence Mittman has been a Director of the Company since October 1998. Mr.
Mittman has been a partner in the law firm of Paul,  Hastings,  Janofsy & Walker
LLP for more than the past five years.

     Isaac  Perlmutter  has served as a Director of the Company since April 1993
and he  served as  Chairman  of the  Board  until  March  1995.  Mr.  Perlmutter
purchased Toy Biz, Inc.'s predecessor  company from Charan  Industries,  Inc. in
January  1990.  Mr.  Perlmutter  is actively  involved in the  management of the
affairs of Toy Biz, Inc. and has been an independent financial investor for more
than  the  past  five  years.  Mr.  Perlmutter  is  also a  director  of  Ranger
Industries,  Inc. As an independent  investor,  Mr. Perlmutter currently has, or
has had within the past five years,  controlling  ownership  interests in Ranger
Industries,  Inc.,  Remington  Products Company,  Westwood  Industries,  Inc., a
manufacturer and distributor of table and floor lamps, Job Lot Incorporated (and
its predecessor Job Lot Associates  L.P.), a discount oriented retail chain, and
Tangible Media, Inc., a media buying and advertising agency.

     Rod Perth has been a Director of the Company since  October 1998.  Mr.Perth
has  been  President  of  Television,   for  Moviewatch   Network,   a  start-up
cable/satellite  network founded by Hubbard  Broadcasting  since September 2000.
From May 1999 until August 2000, he was President,  Jim Henson  Television Group
Worldwide and from October 1994 until July 1998,  Mr. Perth was the President of
USA  Networks  Entertainment  at USA  Network.  At USA  Network,  Mr.  Perth was
responsible  for  the  development  and  production  of  programming,  including
programming  for the Sci-Fi  Channel.  Prior to joining USA  Network,  Mr. Perth
served as Senior Vice President,  Late Night and Non-Network  Programming at CBS
Entertainment, where he was instrumental in the resurgence of the CBS Late Night
Franchise  and was a key  member of the team that  brought  the "Late  Show with
David Letterman" to CBS. Mr. Perth joined the CBS Entertainment division in 1989
as Vice President, Late Night Programs.

     Michael J. Petrick has been a Director of the Company  since  October 1998.
Mr. Petrick is a Managing Director of Morgan Stanley & Co. Incorporated, and has
been with Morgan  Stanley since 1989.  Mr.  Petrick also serves as a Director of
CHI Energy, Inc. and Premium Standard Farms, Inc.

     All of the Company's  Directors were selected pursuant to the Stockholders'
Agreement  (as  defined,  along  with  other  capitalized  terms  used  in  this
paragraph,  in "Certain  Relationships  and  Related  Transactions-Stockholders'
Agreement").  Messrs.  Handel, Arad, Cuneo, Halpin,  Mittman and Perlmutter were
designated by the Investor Group and Messrs. Ganis, Greenhaus, Lynton, Perth and
Petrick were designated by the Lender Group.

                                       21

<PAGE>


Executive Officers

     The following  sets forth the positions  held with the Company and selected
biographical  information for the executive  officers of the Company who are not
Directors.

     Alan Fine served as a Director of the Company from June 1997 until  October
1998.  Mr. Fine has been the  President and Chief  Executive  Officer of Toy Biz
since October 1998. Previously,  he served as the Chief Operating Officer of the
Company,  a position to which he was appointed in September 1996. From June 1996
to September 1996, Mr. Fine was the President and Chief Operating Officer of Toy
Biz International Ltd. From May 1995 to May 1996, Mr. Fine was the President and
Chief  Operating  Officer of Kay-Bee  Toys,  a national toy  retailer,  and from
December 1989 to May 1995, he was the Senior Vice President General  Merchandise
Manager of Kay-Bee Toys.

     William Jemas has been  President,  Publishing and Consumer  Products since
February 2000. Previously he was Executive Vice President, Madison Square Garden
Sports from December 1998 until  February  2000.  From July 1996 until  December
1998, he was founder and President of Blackbox,  L.L.C. and worked and consulted
for several media  companies,  including  Lancet Media,  G-Vox  Interactive  and
Hearst  Entertainment.  From July 1993 until June  1996,  Mr Jemas held  various
executive  positions with The Marvel  Entertainment  Group,  including Executive
Vice President and President of Fleer Corporation.

     Allen S. Lipson has been the Executive  Vice  President  Business and Legal
Affairs and Secretary of the Company since  November  1999.  From May 1996 until
November 1999, Mr. Lipson was Vice  President,  Administration,  General Counsel
and Secretary of Remington  Products  Company L.L.C. and from October 1988 until
May 1996 he was Vice President and General Counsel of Remington.

     Richard Ungar has served as the President of Marvel  Characters Group since
October 1999.  From May 1999 until October 1999, he was a consultant  for Marvel
and from  October 1998 until May 1999,  Mr.  Ungar was Chairman of BKM,  Inc., a
children's  television network.  From January 1997 until October 1998, Mr. Ungar
was an independent consultant/producer and from January 1992 until January 1997,
he held various postions with New World  Entertainment,  including  President of
Prgramming and President and C.E.O. of New World Animation.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities  Exchange Act of 1934 (the "Exchange  Act")
requires the Company's officers and directors, and persons who own more than ten
percent  of a  registered  class of the  Company's  equity  securities,  to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission and the New York Stock Exchange.  Officers, directors and ten-percent
stockholders   are  required  by  regulation  of  the  Securities  and  Exchange
Commission  to furnish the Company  with copies of all Section  16(a) forms they
file.

     Based solely on its review of Forms 3, 4 and 5 available to the Company and
written representations from certain of the directors,  officers and ten-percent
stockholders  that no form is required to be filed, the Company believes that no
director,  officer or  beneficial  owner of more than ten  percent of the Common
Stock  failed to file on a timely  basis  reports  required  pursuant to Section
16(a) of the Exchange Act with respect to 2000,  with the  exception of a Form 3
for Sid Ganis (to report his status as a director) which was filed late.


                                       22

<PAGE>



ITEM 11. EXECUTIVE COMPENSATION

     The  following  table  sets  forth  information  for  the  years  indicated
concerning the compensation awarded to, earned by or paid to the Chief Executive
Officers  of the  Company  during  2000  and  the  Company's  four  most  highly
compensated  executive  officers,  other  than  the  Company's  Chief  Executive
Officers,  who were serving as executive officers of the Company on December 31,
2000 (the "Named Executive  Officers"),  for services rendered in all capacities
to the Company and its subsidiaries during such periods.

<TABLE>
<CAPTION>

                                            Summary Compensation Table
                                                                                                      Long-Term
                                                     Annual Compensation(1)                         Compensation
                                           -------------------------------------------------      ---------------------


                                                                                 Other Annual     Securities Underlying
Name and Principal Position                  Year     Salary($)     Bonus(2)     Compensation         Options(#)
----------------------------                 ----     ---------     -------      ------------     ---------------------
<S>                                          <C>      <C>           <C>          <C>              <C>
F. Peter Cuneo (3)                           2000     $694,615         ---       $ 78,678(4)
     President and Chief Executive           1999      295,000      $490,000                            750,000
     Officer

Alan Fine                                    2000      525,000         ---         8,320(5)
     President and Chief Executive Officer   1999      500,000       225,000       5,673(5)             200,000
     of the Company's Toy Biz Division       1998      425,000       307,001                            300,000

Avi Arad (6)                                 2000      375,000         ---         67,137(7)
     Chief Creative Officer of               1999      375,000       201,563      109,774(7)
     Company and President and Chief         1998      375,000         ---                            1,000,000
     Executive Officer of the Company's
      Marvel Studios Division

William Jemas(8)                             2000       267,307      237,500                            175,000
     President

Richard Ungar(9)                             2000       404,808(10)    ---
     President of Marvel Characters Group    1999        46,479(10)  140,000                            200,000

</TABLE>


(1)  Does not include value of perquisites  and other personal  benefits for any
     Named  Executive  Officer  (other  than Mr.  Cuneo and Mr.  Arad) since the
     aggregate  amount of such  compensation  is the lesser of $50,000 or 10% of
     the total of annual salary and bonus reported for the named executive.

(2)  Bonus  amounts  shown are those accrued for and paid in or after the end of
     the year.

(3)  Mr. Cuneo's employment with the Company commenced in July 1999.

(4)  Amounts shown include  $50,700 for apartment  provided by Company.  $18,000
     car allowance and $9,978 in Company matching contribution to the Company's
     401(k) Plan.

(5)  Amounts  shown are the  Company  matching  contributions  to the  Company's
     401(k) Plan

(6)  Mr. Arad's employment with the Company  commenced in October 1998.  Amounts
     shown for  periods  prior to  October  1, 1998  represent  consulting  fees
     received by Mr. Arad.

(7)  Amounts  shown for  company  provided  automobile  and  driver and in 2000,
     reimbursement  of moving expenses of $38,672 incurred arising from Mr. Arad
     moving to the West Coast

(8)  Mr. Jemas's employment with the Company commenced in February 2000.

(9)  Mr. Ungar's employment with the Company commenced in October 1999.

(10) Amounts shown include  payments to a personal  service company owned by Mr.
     Ungar.


                                       23

<PAGE>



Option Grants Table

     The  following  table shows the  Company's  grants of stock  options to the
Named  Executive  Officers in 2000.  Each stock  option grant was made under the
Stock  Incentive  Plan,  which became  unconditionally  effective on January 20,
1999. No SARs (stock appreciation rights) were granted by the Company in 2000.
<TABLE>
<CAPTION>


                         Number of         Percent of
                         Shares of           Total                                  Potential Realizable
                        Common Stock        Options                                  Value at Assumed Annual
                         Underlying        Granted to      Exercise                   Rates of Stock Price
                       Options Granted      Employees       Price      Expiration        Appreciation
Name                      in 2000           in 2000        per share     Date          for Option Terms
------------           ---------------     -----------     ---------   -----------  ------------------------
                                                                                        5%            10%
                                                                                    -----------     ---------
<S>                     <C>                <C>             <C>         <C>          <C>             <C>

William Jemas (1)......    125,000           20.3%           5.687      2/14/10     $447,140        $1,133,135
William Jemas (2)......     50,000            8.1%           7.375      7/10/10      231,944           587,788

</TABLE>



(1)  Mr. Jemas' options become exercisable in three equal installments:  options
     to buy 41,667 shares of Common Stock become exercisable on each of February
     14, 2001, February 14, 2002 and February 14, 2003.

(2)  Mr. Jemas' options become exercisable in three equal installments:  options
     to buy 16,667  shares of Common Stock are  exercisable  on each of July 10,
     2001, July 10, 2002 and July 10, 2003.



Year-End 2000 Option Value Table

     The  following  table  shows  the  number  and  value  of  exercisable  and
unexercisable stock options held by the Named Executive Officers at December 31,
2000. No Named Executive Officers exercised stock options during 2000.

<TABLE>
<CAPTION>

                                                  Number of Shares of                     Value of
                                                Common Stock Underlying                 Unexercised
                                                Unexercised Options at              In-the-Money Options at
Name                                                 Year-End (1)                          Year-End
--------------                                ----------------------------      ------------------------------
                                              Exercisable    Unexercisable      Exercisable      Unexercisable
                                              -----------    -------------      -----------      -------------
<S>                                           <C>            <C>                <C>              <C>
F. Peter Cuneo...........................     375,000          375,000          ------           --------
Avi Arad.................................     750,000          250,000          ------           --------
Alan Fine................................     291,667          208,333          ------           --------
Rick Ungar...............................      66,667          133,333
William Jemas ..................              ---------        175,000          ------           --------

</TABLE>

(1) Represents  shares of Common Stock  underlying  stock  options.  None of the
Named Executive Officers holds SARs (stock appreciation rights).

Compensation of Directors

     Non-employee  directors currently receive an annual retainer of $25,000 and
an annual  grant of 10,000  shares of  Common  Stock to be  immediately  vested.
Non-employee  directors  also receive a one-time  grant of five-year  options to
purchase  20,000  shares of Common Stock at an exercise  price equal to the fair
market value of the Common Stock on the date of the grant.  Those options expire
within 90 days  following  the date a director  ceases to serve on the Board and
vest  one-third  on the  date  of the  grant  and  one-third  on each of the two
succeeding  anniversaries  of  the  grant.  In  addition,  the  chairmen  of the
Compensation and Nominating  Committee and the Audit Committee receive an annual
retainer of $5,000,  and the  non-executive  Chairman  of the Board  receives an
annual  payment of $100,000 and a one-time  grant of options to purchase  30,000
shares of Common Stock on the same terms as those applicable to the options made
available to the other non-employee members of the Board.

                                       24

<PAGE>


     Members of the Board who are officers or employees of the Company or any of
its  subsidiaries do not receive  compensation  for serving in their capacity as
directors.

Employment Agreements

     The  Company  has  entered  into  employment  agreements  with  each of the
following executive officers: Avi Arad, the Company's Chief Creative Officer and
the  President  and Chief  Executive  Officer of the  Company's  Marvel  Studios
Division;  F. Peter Cuneo,  the  President  and Chief  Executive  Officer of the
Company;  Alan Fine, the President and Chief Executive  Officer of the Company's
Toy Biz Division;  Bill Jemas,  President of Publishing and New Media;  Allen S.
Lipson, the Executive Vice President,  Business and Legal Affairs of the Company
and  Richard  Ungar,  President  of Marvel  Characters  Group.

     Employment and License Agreements with Mr. Arad. Pursuant to his employment
agreement, Mr. Arad has agreed to render his exclusive and full-time services to
the Company for a term of  employment  expiring on December 31, 2000.  Under his
employment agreement,  Mr. Arad receives a base salary, subject to discretionary
increases,  of  $375,000.  Mr.  Arad is entitled  to  discretionary  bonuses and
participation in the Company's stock option plan as determined by the Board. Mr.
Arad also is entitled to the use of an automobile with driver and is entitled to
participate  in employee  benefit  plans  generally  available to the  Company's
employees.  Mr.  Arad's  employment  agreement  provides  that,  in the event of
termination  other than for cause,  Mr. Arad is  entitled  to his salary  earned
through  the date of  termination  and  thereafter  for a period of up to twelve
months. Mr. Arad's employment  agreement replaces his consulting  agreement with
the Company, under which Mr. Arad also earned $375,000 per year.

     In addition, the Company and Arad Associates, of which Mr. Arad is the sole
proprietor,  are  parties  to a  license  agreement  which  provides  that  Arad
Associates   is   entitled  to  receive   royalty   payments  on  net  sales  of
Marvel-character-based toys and on net sales of non-Marvel-character-based  toys
of which Mr. Arad is the inventor of record. In no event, however, may the total
royalties  payable to Arad  Associates  during any  calendar  year  exceed  $7.5
million.  The  Company  accrued  royalties  to Mr.  Arad for toys he invented or
designed of approximately $4.3 million, $3.0 million and $1.6 million during the
years ended December 31, 1998,  1999 and 2000  respectively.  In September 1998,
the license with Arad  Associates  was amended to provide  that Arad  Associates
will  receive an annual  royalty of $650,000  for  products  based on the Marvel
characters  (the former  royalty rate was 4%).  The  amendment  leaves  intact a
provision that Arad Associates is to receive a negotiated  royalty not to exceed
5% of net sales of products not based on the Marvel characters.

     Employment Agreement with Mr. Cuneo.  Pursuant to his employment agreement,
Mr.  Cuneo has agreed to render his  exclusive  and  full-time  services  to the
Company for a term of employment expiring on July 21, 2002. Under his employment
agreement, Mr. Cuneo receives a base salary, subject to discretionary increases,
of  $650,000.  Starting  in 2000,  Mr.  Cuneo will be eligible to earn an annual
bonus based on the attainment of certain  performance  goals.  The target annual
bonus is equal to 60% of Mr.  Cuneo's  base salary.  Mr.  Cuneo also  receives a
$1,500 monthly  automobile  allowance and is entitled to participate in employee
benefit  plans  available to similarly  situated  employees of the Company.  The
Company has agreed to provide Mr.  Cuneo with a suitable  apartment in Manhattan
for up to one year,  and the  Company  will pay Mr.  Cuneo a $25,000  relocation
allowance  if  he  relocates  his  primary   residence  to  the  New  York  City
metropolitan area during the term of his employment.

     Pursuant to his employment agreement, Mr. Cuneo has been granted options to
purchase  750,000  shares of Common  Stock.  The options  vest over a three-year
period.  The options become  exercisable in full upon a change in control of the
Company.

     Employment  Agreement with Mr. Fine. Pursuant to his employment  agreement,
Mr.  Fine has agreed to render  his  exclusive  and  full-time  services  to the
Company for a term of  employment  expiring on March 1, 2001,  which was renewed
for an additional two years. Under his employment agreement, Mr. Fine receives a
base  salary,  subject to  discretionary  increases,  of  $500,000.  Mr. Fine is
eligible to earn an annual bonus based on the attainment of certain  performance
goals.  The  employment  agreement  further  provides for  participation  in the
Company's  stock option plan as  determined  by the Board and provides  that Mr.
Fine shall be entitled to receive a grant of options to purchase  200,000 shares
of Common  Stock (in addition to the options  previously  granted to Mr. Fine to
purchase  300,000  shares of Common  Stock).  Mr.  Fine also  receives  a $1,000
monthly automobile  allowance and is entitled to participate in employee benefit
plans generally available to the Company's employees.

                                       25

<PAGE>


     Employment Agreement with Mr. Jemas.  Pursuant to his employment agreement,
Mr.  Jemas has agreed to render his  exclusive  and  full-time  services  to the
Company  for a term of  employment  expiring  on February  15,  2002.  Under his
employment agreement, Mr. Jemas receives a base salary, subject to discretionary
increases, of $275,000. The employment agreement provides for a sign-on bonus of
$100,000  payable in two installments of $50,000 each and a bonus for 2000 equal
to at least 50% of his base  salary  for the year.  Mr.  Jemas  also  receives a
$1,100 monthly  automobile  allowance and is entitled to participate in employee
benefit plans  generally  available to the Company's  employees.  The employment
agreement  further provides for participation in the Company's stock option plan
as  determined  by the Board and  provides  that Mr.  Jemas shall be entitled to
receive a grant of options to purchase 125,000 shares of Common Stock

     Employment  and  Agreement  with  Mr.Ungar.   Pursuant  to  his  employment
agreement, Mr. Ungar has agreed to render his services to the Company for a term
of  employment  expiring on October 25, 2002.  Under his  employment  agreement,
Mr.Ungar  receives  a  base  salary,  subject  to  discretionary  increases,  of
$325,000.  Mr. Ungar is eligible to earn an annual bonus based on the attainment
of  certain  performance  goals.  Mr.  Ungar  also  receives  a  $1,300  monthly
automobile  allowance and is entitled to participate  in employee  benefit plans
available  to  similarly  situated  employees  of the  Company.  Pursuant to his
employment  agreement,  Mr. Ungar has been granted  options to purchase  200,000
shares of Common Stock. The options will vest over a three-year period.

     In  addition,   the  Company  and  Brentwood   Television   Funnies,   Inc.
("Brentwood"), of which Mr. Ungar is the sole shareholder, are parties to a Loan
Out Agreement under which Brentwood  agrees to provide the services of Mr. Ungar
as Executive Producer on all television programs involving Marvel characters for
a term expiring on October 25, 2002. Under the agreement,  Brentwood  receives a
producer fee of $175,000 per year, subject to discretionary increases.

     Termination  Provisions.  The employment  agreements of Messrs Cuneo, Fine,
Jemas and Ungar and the Loan Out Agreement with Brentwood,  provide that, in the
event of termination, the executive is entitled to certain payments and benefits
depending on the  circumstances of the termination.  Upon a change in control of
the Company, the executive is entitled to a severance payment equal to two times
the sum of his  then-current  base salary and the average of the two most recent
annual  bonuses  paid.  If any payments to the  executive  under his  employment
agreement  ("Parachute  Payments") would be subject to the excise tax imposed by
Section 4999 of the Internal  Revenue Code,  then the executive will be entitled
to receive an additional  payment from the Company (a "Gross-Up  Payment") in an
amount  such that the  executive  retains,  after the  payment of all taxes,  an
amount of the Gross-Up  Payment equal to the excise tax imposed on the Parachute
Payments.

     Confidential  Information  and Related  Provisions.  Each of the employment
agreements with Messrs.  Arad, Cuneo, Fine, Jemas and Ungar prohibits disclosure
of  proprietary  and  confidential  information  regarding  the  Company and its
business to anyone  outside the Company both during and subsequent to employment
and otherwise  provides that all inventions  made by the employees  during their
employment  belong to the Company.  In addition,  those  employees  agree during
their employment,  and for one year thereafter, not to engage in any competitive
business activity.

Compensation Committee Interlocks and Insider Participation

     Messrs. Handel, Halpin, Perlmutter and Petrick serve now, and served during
2000,  on the  Company's  Compensation  and  Nominating  Committee.  None of the
individuals mentioned above was an officer or employee of the Company, or any of
its  subsidiaries,  during 2000 or formerly.  Mr. Handel is, and Mr.  Perlmutter
once was, the Company's non-executive Chairman of the Board.


                                       26

<PAGE>


    Stockholders' Agreement

     The Company and the following  stockholders  are parties to a Stockholders'
Agreement (the "Stockholders' Agreement") dated as of October 1, 1998:

     (1)  (i) Avi Arad, (ii) Isaac Perlmutter, (iii) Isaac Perlmutter T.A., (iv)
          The Laura and Isaac  Perlmutter  Foundation  Inc.,  (v) Object Trading
          Corp., and (vi) Zib Inc. (the "Perlmutter/Arad Group");

     (2)  (i) Mark Dickstein,  (ii) Dickstein & Company,  L.P.,  (iii) Dickstein
          Focus Fund L.P.,  (iv)  Dickstein  International  Limited,  (v) Elyssa
          Dickstein,  Jeffrey  Schwarz  and  Alan  Cooper  as  Trustees  U/T/A/D
          12/27/88,  Mark  Dickstein,  Grantor,  (vi) Mark  Dickstein and Elyssa
          Dickstein,  as Trustees of the Mark and Elyssa  Dickstein  Foundation,
          and (vii) Elyssa  Dickstein (the  "Dickstein  Entities" and,  together
          with the Perlmutter/Arad Group, the "Investor Group"); and

     (3)  (i) The Chase Manhattan  Bank, (ii) Morgan Stanley & Co.  Incorporated
          ("Morgan Stanley"),  and (iii) Whippoorwill as agent of and/or general
          partner for certain accounts and funds (the "Lender Group").

     The Stockholders' Agreement provides that its parties will take such action
as may  reasonably  be in their power to cause the Board to include,  subject to
certain  conditions,  six directors  designated  by the Investor  Group and five
directors  designated  by the Lender  Group.  The number of  directors  that the
Investor Group and the Lender Group may designate will be reduced following June
30, 2000 in the event of decreases in  beneficial  ownership of capital stock of
the  Company  below  certain   pre-determined   levels,  as  set  forth  in  the
Stockholders'  Agreement.  The Stockholders' Agreement provides for the creation
of  various  committees  of the  Board  as  well  as the  composition  of  those
committees.

     The parties to the  Stockholders'  Agreement have the power to vote, in the
aggregate,  approximately  55.8% in  combined  voting  power of the  outstanding
shares of Common Stock and 8% Preferred Stock. The 55.8% figure does not include
shares beneficially owned by the Dickstein Entities. Those shares are covered by
the Stockholders'  Agreement,  but the Company does not know the number of those
shares. The Dickstein Entities beneficially own less than 5% of the Common Stock
and no longer file ownership reports on Schedules 13D or 13G with the Securities
and Exchange Commission.

    Registration Rights Agreements

     Mr.  Dickstein and certain of his  affiliates,  Object  Trading  Corp.  (an
affiliate of Mr.  Perlmutter),  Whippoorwill as agent for and/or general partner
for certain  institutions  and funds,  the Company and certain other parties are
parties  to a  Registration  Rights  Agreement  dated as of October 1, 1998 (the
"October  Registration  Rights  Agreement").  Mr. Arad, Mr. Perlmutter,  certain
affiliates of Mr.  Perlmutter  (other than Object Trading Corp.) and the Company
are parties to a Registration Rights Agreement dated as of December 8, 1998 (the
"December Registration Rights Agreement").

     The terms of the December  Registration  Rights Agreement are substantially
identical to those of the October Registration Rights Agreement. Under the terms
of each of the Registration Rights Agreements,  the Company has agreed to file a
shelf registration  statement under the Securities Act registering the resale of
all shares of Common  Stock and 8%  Preferred  Stock  issued to the  stockholder
parties  thereto  pursuant to the Plan, all shares of Common Stock issuable upon
conversion  of those  shares of 8% Preferred  Stock,  certain  convertible  debt
securities  that the Company may  exchange  for the 8%  Preferred  Stock and the
Common Stock  issuable  upon  conversion  thereof and all shares of Common Stock
otherwise owned by the stockholder parties to the respective Registration Rights
Agreement as of the date thereof.  The Registration  Rights Agreements also give
the stockholder  parties thereto piggyback  registration  rights with respect to
underwritten public offerings by the Company of its equity securities.

    Agreements Relating to the Purchase of Preferred Shares

     Zib (an entity owned entirely by Mr.  Perlmutter),  Dickstein Partners Inc.
(an  affiliate of Mr.  Dickstein)  and Toy Biz,  Inc.  entered into a Commitment
Letter,  dated  November  19, 1997,  in which Zib and  Dickstein  Partners  Inc.
committed  to purchase $60 million and $30 million in amount,  respectively,  of
the 8%  Preferred  Stock of the  Company  to be  issued  pursuant  to the  Plan.
Pursuant to the Plan and a Stock Purchase Agreement dated as of October 1, 1998,
(i) certain  secured  creditors of MEG  purchased,  pursuant to an option in the
Plan, $20,071,480 in amount of 8% Preferred Stock that would otherwise have been
purchased by Zib;  (ii)  Whippoorwill,  as agent of and/or  general  partner for
certain institutions and funds,  purchased,  pursuant to an assignment from Zib,
$5  million in amount of 8%  Preferred  Stock  that  would  otherwise  have been

                                       27

<PAGE>


purchased  by Zib;  (iii) Zib  purchased  $34,928,520  in amount of 8% Preferred
Stock; and (iv) Dickstein Partners Inc. and its assignees  purchased $30 million
in amount of 8% Preferred Stock.

   Tangible Media Advertising Services

     Tangible Media, a corporation which is wholly owned by Mr. Perlmutter, acts
as  the  Company's  media   consultant  in  placing  certain  of  the  Company's
advertising and, in connection therewith,  receives certain fees and commissions
based on the cost of the placement of such advertising.  Tangible Media received
payments  of fees  and  commissions  from  the  Company  totaling  approximately
$1,147,000,  $1,170,000 and $966,000 in 1998, 1999, and 2000  respectively.  The
Company  retains the services of a  non-affiliated  media  consulting  agency on
matters of advertising creativity.

    Employee, Office Space and Overhead Cost Sharing Arrangements

     The Company and Tangible  Media have shared  certain space at the Company's
principal executive offices and related overhead expenses.  Since 1994, Tangible
Media and the  Company  have  been  parties  to an  employee,  office  space and
overhead cost sharing  agreement  governing the Company's  sharing of employees,
office space and overhead  expenses  (the "Cost Sharing  Agreement").  Under the
Cost Sharing  Agreement,  any party  thereto may through its  employees  provide
services to another party, upon request,  whereupon the party receiving services
shall  be  obligated  to  reimburse  the  providing  party  for the cost of such
employees'  salaries and benefits accrued for the time devoted by such employees
to providing  services.  Under the Cost  Sharing  Agreement,  Tangible  Media is
obligated to  reimburse  the Company for rent paid under the  sublease,  related
overhead expenses comprised of commercial rent tax, repair and maintenance costs
and telephone and facsimile services, in proportion to its percentage occupancy.
The Cost  Sharing  Agreement  is  coterminous  with  the  term of the  Company's
sublease for its executive  offices.  Under this Agreement,  Tangible Media paid
approximately  $147,000,  $155,000 and $67,000 to the Company in 1998,  1999 and
2000 respectively.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of Common Stock and 8% Preferred  Stock, as of March 9, 2001 (based on
33,947,923) shares of Common Stock outstanding on that date), by (i) each person
known by the Company to be the beneficial owner of 5% or more of the outstanding
Common Stock or 8% Preferred Stock (based, in part, upon copies of all Schedules
13D and 13G provided to the Company),  (ii) each director of the Company,  (iii)
each Named  Executive  Officer and (iv) all executive  officers and directors of
the  Company  as a group.  Because  the voting or  dispositive  power of certain
shares listed in the table is shared,  the same securities are sometimes  listed
opposite  more  than  one  name  in the  table  and the  sharing  of  voting  or
dispositive  power is  described  in a footnote.  The total  number of shares of
Common Stock and 8% Preferred  Stock listed below for  directors  and  executive
officers as a group eliminates such duplication.

          Each share of 8%  Preferred  Stock is  convertible  by its holder into
1.039 shares of Common Stock. The table assumes that no unexercised warrants for
the purchase of stock of the Company have been exercised.  As far as the Company
is aware, none of the stockholders  named in the table owns any warrants for the
purchase of stock of the Company.

          Under the rules of the Securities and Exchange Commission,  beneficial
ownership of a share of 8% Preferred Stock constitutes  beneficial  ownership of
1.039 shares of Common  Stock (the amount into which the 8%  Preferred  Stock is
convertible).  Beneficial ownership of Common Stock is shown in the main part of
the table and the portion of that beneficial  ownership  traceable to beneficial
ownership of 8% Preferred Stock is set forth in the footnotes.

          The Schedules 13D and 13G that the Company used in compiling the table
take  differing  positions  as  to  whether  shares  of  stock  covered  by  the
Stockholders'  Agreement are held with "shared voting power." The table does not
attempt to reconcile those differences.

                                       28

<PAGE>

<TABLE>
<CAPTION>


                    Shares of Common Stock Beneficially Owned

                                             Sole Voting      Shared Voting          Sole Dispositive      Shared Dispositive
                                                Power            Power                    Power                   Power
                                          -----------------   --------------------   ----------------      -------------------
Five Percent Stockholder,
       Directors                                    Percent               Percent               Percent               Percent
  and Executive Officers                  Number    of Class  Number      of Class   Number     of Class   Number     of Class
---------------------------               -------   --------  -------     --------   ------     --------   -------    --------
<S>                                       <C>       <C>       <C>         <C>        <C>        <C>        <C>        <C>
Avi Arad (1)(2).........................    --         *      31,706,096   68.0%     4,920,000  14.2%        --           *
    623 North Sierra Drive
    Beverly Hills, CA  90210
Isaac Perlmutter(2)(3)..................    --         *      31,706,096   68.0%    15,270,151  38.9%        --           *
    P.O. Box 1028
    Lake Worth, Florida 33460
The Chase Manhattan Corporation (2)(4)..    --         *      31,706,096   68.0%     2,253,826   6.5%        --           *
    270 Park Avenue
    New York, New York 10017
Morgan Stanley & Co.
Incorporated(2)(5)......................    --         *      31,706,096   68.0%        --        *        5,401,810   14.6%
    1585 Broadway
    New York, New York 10036
Whippoorwill Associates, Inc.
as agent of and/or general
partner for certain institutions
and funds (6)..........................     --         *       3,941,037   10.8%        --        *        3,941,037   10.8%
    11 Martine Avenue
    White Plains, NY 10606
Mark H. Rachesky, M.D. (7).............     --         *       2,282,709    6.3%        --        *        2,282,709    6.3%
Morton E. Handel (8)...................     81,000     *          --         *          --        *          --           *
F. Peter Cuneo (9).....................    395,214    1.2%        --         *          --        *          --           *
Sid Ganis(10)..........................     33,334     *          --         *          --        *          --           *
Shelley F. Greenhaus (11)..............     50,000     *          --         *          --        *          --           *
James F. Halpin (12)...................     55,000     *          --         *          --        *          --           *
Lawrence Mittman (12)..................     50,000     *          --         *          --        *          --           *
Rod Perth (12).........................     50,000     *          --         *          --        *          --           *
Michael J. Petrick.....................     --         *          --         *          --        *          --           *
Alan Fine (14).........................    358,334    1.0%        --         *          --        *          --           *
William Jemas..........................     41,667     *          --         *          --        *          --           *
Richard Ungar..........................     66,667     *          --         *          --        *          --           *
All current  executive  officers and
   directors as a group
   (16 persons)(2)(19).................  1,237,216   3.5%     31,706,096   68.0%    20,190,151  50.5%        --           *

</TABLE>

* Less than 1%.

(1)  Figures  include  770,000  shares of Common Stock  subject to stock options
     granted  to Mr.  Arad  pursuant  to the  Stock  Incentive  Plan  which  are
     immediately  exercisable.   Mr.  Arad  is  a  party  to  the  Stockholders'
     Agreement.  Except for the  4,920,000  shares  over  which Mr.  Arad may be
     deemed to have sole  dispositive  power,  shares over which Mr. Arad may be
     deemed to have shared  voting power (which  include  shares of Common Stock
     underlying  11,433,341 shares of 8% Preferred Stock) are beneficially owned
     by other parties to the Stockholders' Agreement and it is only by reason of
     Mr. Arad's position as a party to the Stockholders' Agreement that Mr. Arad
     may be deemed to possess that shared voting power.

(2)  Figures  in the  table  and in the  footnotes  for  the  number  of  shares
     beneficially owned by parties to the Stockholders' Agreement do not include
     shares  beneficially  owned by Dickstein  Partners  Inc. and certain of its
     affiliates that are signatories to the Stockholders'  Agreement.  Shares of
     Common  Stock  beneficially  owned by  Dickstein  Partners  Inc.  and those

                                       29

<PAGE>


     affiliates are covered by the Stockholders' Agreement, but the Company does
     not know the  number  of those  shares.  Dickstein  Partners  Inc.  and its
     affiliates  beneficially own less than 5% of the Common Stock and no longer
     file  ownership  reports on Schedules  13D or 13G with the  Securities  and
     Exchange Commission.

(3)  Mr. Perlmutter is a party to the Stockholders' Agreement.

     (a) Figures  include 30,000 shares of Common Stock subject to stock options
       granted to Mr. Perlmutter  pursuant to the Stock Incentive Plan which are
       immediately  exercisable.  Other shares over which Mr.  Perlmutter may be
       deemed to have sole dispositive power are directly held as follows:

<TABLE>
<CAPTION>


                               Holder                                  Shares of Common Stock  Shares of 8% Preferred Stock
     ------------------------------------------------------------      ----------------------  ----------------------------
     <S>                                                               <C>                     <C>
     Zib...........................................................         9,256,000                 --
     The Laura and Isaac Perlmutter Foundation Inc.................           250,000                 --
     Object Trading Corp...........................................            33,500             4,174,278
     Classic Heroes, Inc...........................................               --                276,020
     Biobright Corporation.........................................               --                276,020
     Tangible Media, Inc...........................................           400,000                  --
     Isaac Perlmutter T.A..........................................               --                347,456
     Isaac Perlmutter..............................................            29,000                 --

</TABLE>

     The sole  stockholder of Zib, a Delaware  corporation,  is Isaac Perlmutter
     T.A., a Florida trust (the "Perlmutter Trust"). Mr. Perlmutter is a trustee
     and the sole beneficiary of the Perlmutter  Trust, and may revoke it at any
     time. Mr. Perlmutter is a director and the president of the Laura and Isaac
     Perlmutter  Foundation  Inc.,  a Florida  not-for-profit  corporation.  Mr.
     Perlmutter is the sole  stockholder of (i) Object Trading Corp., a Delaware
     corporation,  (ii) Classic Heroes,  Inc., a Delaware  corporation and (iii)
     Biobright Corporation, a Delaware corporation and (iv)Tangible Media, Inc.,
     a Delaware  Corporation.  Mr.  Perlmutter  may be deemed to possess (i) the
     power to vote and dispose of the shares of Common  Stock  directly  held by
     Zib, Object Trading Corp.,  Classic Heroes,  Inc.,  Biobright  Corporation,
     Tangible Media,  Inc. and the Perlmutter Trust and (ii) the power to direct
     the vote and disposition of the shares of Common Stock directly held by the
     Laura and Isaac Perlmutter Foundation Inc.

     (b) Except for the  15,270,151  shares  over  which Mr.  Perlmutter  may be
    deemed to have sole dispositive  power (which include shares of Common Stock
    underlying  5,073,774 shares of 8% Preferred  Stock),  shares over which Mr.
    Perlmutter  may be deemed to have shared voting power (which  include shares
    of Common Stock  underlying  11,433,341  shares of 8%  Preferred  Stock) are
    beneficially  owned by  parties  to the  Stockholders'  Agreement  which are
    unaffiliated   with  Mr.  Perlmutter  and  it  is  only  by  reason  of  Mr.
    Perlmutter's  position as a party to the  Stockholders'  Agreement  that Mr.
    Perlmutter may be deemed to possess that shared voting power.

(4) (a)  Shares  over  which  The  Chase  Manhattan   Corporation,   a  Delaware
    corporation,  may be deemed to have sole dispositive power are held directly
    by The Chase Manhattan Bank, a New York  corporation that is wholly owned by
    The Chase Manhattan Corporation.  The Chase Manhattan Bank is a party to the
    Stockholders' Agreement.

     (b)  Except  for the  2,253,826  shares  over  which  The  Chase  Manhattan
    Corporation  may be deemed to have sole  dispositive  power  (which  include
    shares of Common Stock  underlying  928,825  shares of 8% Preferred  Stock),
    shares  over  which The Chase  Manhattan  Corporation  may be deemed to have
    shared  voting  power  (which  include  shares  of Common  Stock  underlying
    11,433,341  shares of 8% Preferred Stock) are beneficially  owned by parties
    to the  Stockholders'  Agreement  which  are  unaffiliated  with  The  Chase
    Manhattan Corporation and it is only by reason of The Chase Manhattan Bank's
    position as a party to the Stockholders'  Agreement that The Chase Manhattan
    Corporation may be deemed to possess that shared voting power.

(5)  Morgan Stanley is a party to the  Stockholders'  Agreement.  Morgan Stanley
     shares  dispositive  power over  5,401,810  shares with its parent,  Morgan
     Stanley Dean Witter & Co. Except for those 5,401,810  shares (which include
     shares of Common Stock underlying  3,015,049 shares of 8% Preferred Stock),
     shares over which Morgan  Stanley may be deemed to have shared voting power
     (which include shares of Common Stock  underlying  11,433,341  shares of 8%
     Preferred  Stock) are  beneficially  owned by parties to the  Stockholders'
     Agreement  which are  unaffiliated  with  Morgan  Stanley and it is only by
     reason  of  Morgan  Stanley's  position  as a  party  to the  Stockholders'
     Agreement  that Morgan  Stanley may be deemed to possess that shared voting
     power.

                                       30

<PAGE>


(6)  Whippoorwill  may be  deemed  to be the  beneficial  owner of these  shares
     (which include  shares of Common Stock  underlying  2,466,072  shares of 8%
     Preferred Stock) because it has discretionary authority with respect to the
     investments  of, and acts as agent for,  the direct  holders of the shares.
     Whippoorwill  disclaims  any  beneficial  ownership  of Common  Stock or 8%
     Preferred Stock except to the extent of Whippoorwill's  pecuniary  interest
     in that stock, if any. Whippoorwill, as agent of and/or general partner for
     certain institutions and funds, is a party to the Stockholders'  Agreement.
     Figures  include  80,730  shares of Common Stock (which  include  shares of
     Common Stock  underlying  50,379 shares of 8% Preferred Stock) that are not
     subject to the Stockholders' Agreement.

(7)  Based on a Schedule 13G filed with the Securities  and Exchange  Commission
     on  November  12,  1999 by (i) MHR  Institutional  Partners  LP, a Delaware
     limited partnership  ("Institutional  Partners");  (ii) MHRM Partners LP, a
     Delaware  limited  partnership  ("MHRM");  (iii) MHR Capital Partners LP, a
     Delaware limited partnership ("Capital  Partners");  (iv) MHR Institutional
     Advisors  LLC,  a  Delaware  limited  liability   company   ("Institutional
     Advisors") and the general partner of Institutional  Partners and MHRM; (v)
     MHR Advisors LLC, a Delaware limited liability company ("Advisors") and the
     general partner of Capital Partners;  and (vi) Mark H. Rachesky,  M.D., the
     managing member of Institutional Advisors and Advisors. Each party named in
     this footnote has an office at 40 West 57th Street,  33rd Floor,  New York,
     NY 10019.  Figures  include  shares of Common  Stock  underlying  2,119,036
     shares of 8% Preferred Stock.

(8)  Figures  include  60,000  shares of Common Stock  subject to stock  options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(9)  Figures  include  375,000  shares of Common Stock  subject to stock options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable  and 214 shares of Common Stock,  of which Mr. Cuneo  disclaims
     beneficial ownership, owned by Mr. Cuneo's son.

(10) Figures  include 23,334  shares of Common  Stock  subject to stock  options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(11) Figures  include  30,000  shares of Common Stock  subject to stock  options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable. Does not include shares held by various institutions and funds
     with respect to whose investments  Whippoorwill has discretionary authority
     and for which  Whippoorwill  acts as agent.  Mr. Greenhaus is the president
     and managing director of Whippoorwill.  Mr. Greenhaus disclaims  beneficial
     ownership  of the shares of Common  Stock and 8%  Preferred  Stock owned by
     discretionary accounts managed by Whippoorwill as set forth above except to
     the extent of his pecuniary interest in that stock, if any.

(12) Figures  include  30,000  shares of Common Stock  subject to stock  options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(13) Figures  include  358,334  shares of Common Stock  subject to stock options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(14) Figures  include  41,667  shares of Common Stock  subject to stock  options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.


(15) Figures  include  66,667   shares of Common Stock  subject to stock options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(16) Figures in the "Sole  Voting  Power"  column,  the  "Shared  Voting  Power"
     column,  include,  respectively,  1,095,002,  800,000 and 800,000 shares of
     Common  Stock  granted  pursuant  to the  Stock  Incentive  Plan  which are
     immediately exercisable.

                                       31

<PAGE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For  a  description  of  certain  relationships  and  related  transactions
involving  individuals  who served during 2000 on the Board's  Compensation  and
Nominating   Committee   (or  its   predecessor),   see  "Item   11.   Executive
Compensation-Compensation Committee Interlocks and Insider Participation."

                                 Notes Offering

       Morgan  Stanley,  a  beneficial  owner of more  than 5% of the  Company's
Common  Stock,  acted as a placement  agent in the  previously  described  Notes
Offering,  which the Company  completed  on February  25,  1999.  The Notes were
offered  only (i) to  qualified  institutional  buyers  under  Rule  144A of the
Securities Act and (ii) outside the United States in compliance  with Regulation
S. As a placement agent,  Morgan Stanley purchased the Notes from the Company at
a discount.  The Company and certain of its  subsidiaries,  on the one hand, and
the placement agents  (including  Morgan Stanley),  on the other hand, agreed to
indemnify each other against  certain  liabilities in connection  with the Notes
Offering, including liabilities under the Securities Act.

                        Other Agreements with Affiliates

     On March 5, 1999, the Company  engaged Morgan Stanley to provide  financial
advice and assistance. In exchange for those services, the Company has agreed to
pay Morgan Stanley a fee of $1,750,000.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)    Documents Filed with this Report

               1.   Financial Statements

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

               2.   Financial Statement Schedule

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

               3.   Exhibits

                    See the accompanying Exhibit Index appearing on page 46.

          (b)  Reports on Form 8-K. During the last quarter of 1999, the Company
               filed the following Current Reports on Form 8-K:

               1.   Current Report on Form 8-K dated October 14, 1999, reporting
                    Items 5 and 7.

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




                                       32

<PAGE>




                                  EXHIBIT INDEX

Exhibit No.

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

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

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

3.2       Bylaws (as  restated  and  amended).  (Incorporated  by  reference  to
          Exhibit 3.2 of the  Company's  Annual Report on Form 10-K for the year
          ended December 31, 1998.)

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

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

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

4.4       Plan  Warrant  Agreement,  dated as of October 1,  1998,  between  the
          Registrant and American  Stock  Transfer & Trust  Company,  as warrant
          agent.  (Incorporated  by  reference  to Exhibit 4.2 to the  Company's
          Current  Report on Form 8-K dated  October 13, 1998 and filed with the
          Securities and Exchange Commission on October 14, 1998.)

4.5       Class A Warrant  Agreement,  dated as of October 1, 1998,  between the
          Registrant and American  Stock  Transfer & Trust  Company,  as warrant
          agent.  (Incorporated  by  reference  to Exhibit 4.3 to the  Company's
          Current  Report on Form 8-K dated  October 13, 1998 and filed with the
          Securities and Exchange Commission on October 14, 1998.)

4.6       Class B Warrant  Agreement,  dated as of October 1, 1998,  between the
          Registrant and American  Stock  Transfer & Trust  Company,  as warrant
          agent.  (Incorporated  by  reference  to Exhibit 4.4 to the  Company's
          Current  Report on Form 8-K dated  October 13, 1998 and filed with the
          Securities and Exchange Commission on October 14, 1998.)

4.7       Class C Warrant  Agreement,  dated as of October 1, 1998,  between the
          Registrant and American  Stock  Transfer & Trust  Company,  as warrant
          agent.  (Incorporated  by  reference  to Exhibit 4.5 to the  Company's
          Current  Report on Form 8-K dated  October 13, 1998 and filed with the
          Securities and Exchange Commission on October 14, 1998.)

10.1      Revolving  Credit Facility between the Company and Citibank N.A. dated
          as of April 1, 1999. (Incorporated by reference to Exhibit 10.1 to the
          Company's  Quarterly  Report on Form 10-Q for the quarter  ended March
          31, 1999.)

10.2      Security Agreement,  dated as of April 1, 1999, among the Company, the
          subsidiary  guarantors  party thereto and Citibank N.A., as collateral
          agent.  (Incorporated  by reference  to Exhibit 10.2 of the  Company's
          Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.)

                                       33

<PAGE>


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

10.4      Stock  Purchase  Agreement,  dated as of October 1, 1998, by and among
          the Registrant and Dickstein & Co., L.P.,  Dickstein  Focus Fund L.P.,
          Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and
          Alan Cooper as Trustees  U/T/A/D  12/27/88,  Mark Dickstein,  Grantor,
          Mark  Dickstein  and Elyssa  Dickstein,  as  Trustees  of the Mark and
          Elyssa Dickstein Foundation,  Elyssa Dickstein,  Object Trading Corp.,
          and Whippoorwill Associates, Incorporated.  (Incorporated by reference
          to Exhibit 99.3 to the  Company's  Current  Report on Form 8-K/A dated
          and filed with the Securities  and Exchange  Commission on October 16,
          1998.)

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

10.6      Registration  Rights  Agreement,  dated as of December 8, 1998, by and
          among the  Registrant,  Marvel  Entertainment  Group,  Inc., Avi Arad,
          Isaac Perlmutter,  Isaac Perlmutter T.A., The Laura & Isaac Perlmutter
          Foundation  Inc., and Zib Inc.  (Incorporated  by reference to Exhibit
          10.4 of the Registrants  Annual Report on Form 10-K for the year ended
          December 31, 1998.)

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

10.8      Lease  dated as of July 1, 1986,  between 387 P.A.S.  Enterprises  and
          Cadence Industries Corporation (9th Floor). (Incorporated by reference
          to Exhibit 10.7 to the Registration  Statement of Marvel Entertainment
          Group, Inc. on Form S-1, File No. 33-40574, dated May 14, 1991.)

10.9      Lease  Modification and Extension  Agreement dated as of July 1, 1991,
          between 387 P.A.S.  Enterprises  and the Marvel  Entertainment  Group,
          Inc. (9th, 10th, 11th and 12th Floors).  (Incorporated by reference to
          Exhibit 10.9 to the Annual Report on Form 10-K of Marvel Entertainment
          Group, Inc. for the fiscal year ended December 31, 1991.)

10.10     Sublease,  dated as of June 9,  2000  betrween  HSBC  Bank USA and the
          Registrant,  as amended by First  Amendment to Sublease dated December
          1, 2000.

10.11     License Agreement,  dated March 1, 1993, by and between the Registrant
          and Gerber  Products  Company as amended by Amendment  thereto,  dated
          April 5, 1995.  (Incorporated  by  reference  to Exhibit  10.13 to the
          Company's  Registration  Statement on Form S-1, File No.  33-87268 and
          Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the
          quarter  ended  June  30,  1995.)  (Confidential  treatment  has  been
          requested for a portion of this exhibit.)

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

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

                                       34

<PAGE>


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

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

10.16     Employment  Agreement by and between the Company and Alan Fine,  dated
          as of March 1, 1999. (Incorporated by reference to Exhibit 10.2 to the
          Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
          1999.)*

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

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

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

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

10.21     1998 Stock  Incentive Plan.  (Incorporated  by reference to Annex A of
          the Company's  Information  Statement on Schedule 14C,  filed with the
          Securities and Exchange Commission on December 30, 1998.)*

10.22     Amended and Restated Master Agreement,  dated as of November 19, 1997,
          by and among the Registrant,  certain secured  creditors of Marvel and
          certain  secured  creditors  of  Panini  SpA  and  Amendments  1 and 2
          thereto.  (Incorporated by reference to Exhibit 10.26 of the Company's
          Annual Report on Form 10-K for the year ended December 31, 1997.)

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

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

10.25     Commitment  Letter,  dated as of November 19, 1997, by and between the
          Registrant,  Dickstein  Partners Inc., and Zib Inc.  (Incorporated  by
          reference to Exhibit 10.3 to the Company's  Current Report on Form 8-K
          dated November 24, 1997).

10.26     Agreement,  dated as of  November  19,  1997,  by and among  Dickstein
          Partners,  Inc.,  Isaac  Perlmutter,  Avi Arad and  Joseph  M.  Ahearn
          (Incorporated  by reference to Exhibit 10.4 to the  Company's  Current
          Report on Form 8-K dated November 24, 1997).

21        Subsidiaries of the Registrant.

23        Consent of Independent Auditors.

23.1      Consent of Independent Auditors.

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

* Management contract or compensatory plan or arrangement.

                                       35
<PAGE>


                                   SIGNATURES

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

MARVEL ENTERPRISES, INC.

By: /s/ F. Peter Cuneo
-----------------------
F. Peter Cuneo

President, Chief Executive Officer
  and Acting Chief Financial Officer


Date: March 30, 2001



                               POWER OF ATTORNEY

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

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

Signature                            Title                           Date
-----------------     ----------------------------------          --------------
                        President, Chief Executive Officer
/s/F. Peter Cuneo       Acting Chief Financial Officer            March 30, 2001
-----------------    and Director (principal executive officer)
F. Peter Cuneo

/s/ Morton E. Handel   Chairman of the Board of Directors         March 30, 2001
--------------------
Morton E. Handel

/s/ Avi Arad                   Director                           March 30, 2001
------------
Avi Arad

                               Director                           March 30, 2001
------------
Sid Ganis

                               Director                           March 30, 2001
---------------------
Shelley F. Greenhaus

/s/ James F. Halpin
-------------------            Director                           March 30, 2001
James F. Halpin

/s/ Lawrence Mittman           Director                           March 30, 2001
--------------------
Lawrence Mittman


                                       36
<PAGE>



/s/ Isaac Perlmutter           Director                           March 30, 2001
--------------------
Isaac Perlmutter

/s/ Rod Perth                  Director                           March 30, 2001
-------------
Rod Perth

                               Director                           March 30, 2001
----------------------
Michael J. Petrick

                                       37

<PAGE>






                          INDEX TO FINANCIAL STATEMENTS

                        AND FINANCIAL STATEMENTS SCHEDULE

<TABLE>
<CAPTION>


  Marvel Enterprises, Inc.                                                                                   Page
--------------------------                                                                                   ----
<S>                                                                                                          <C>
Report of Independent Auditors..........................................................................     F-2
Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000...............................     F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1999, and 2000.............     F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1999, and
   2000.................................................................................................     F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999, and 2000.............     F-6
Notes to Consolidated Financial Statements..............................................................     F-7


Financial Statement Schedule

Schedule II-Valuation and Qualifying Accounts...........................................................    F-33
</TABLE>

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




                                                     F-1

<PAGE>




                         REPORT OF INDEPENDENT AUDITORS

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

     We have  audited the  accompanying  consolidated  balance  sheets of Marvel
Enterprises,  Inc. and  subsidiaries  as of December 31, 2000 and 1999,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December  31,  2000.  Our
audits also included the  financial  statement  schedule  listed in the Index at
Item 14 (a). These financial  statements and schedule are the  responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in  all  material  respects,  the  consolidated  financial  position  of  Marvel
Enterprises,  Inc.  and  subsidiaries  at December  31,  2000 and 1999,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles  generally accepted in the United States.  Also, in our opinion,  the
related financial statement  schedule,  when considered in relation to the basic
financial statements taken as a whole,  presents fairly in all material respects
the information set forth therein.

                                  /S/ ERNST & YOUNG LLP

New York, New York
February 9, 2001

                                                     F-2

<PAGE>



                            MARVEL ENTERPRISES, INC.

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>


                                                                                    December 31,   December 31,
                                                                                    ---------------------------
                                                                                        1999          2000
                                                                                    -----------     --------
                                                                                      (in thousands, except
                                                                                           share data)
<S>                                                                                 <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents......................................................   $    64,814     $ 22,803
  Accounts receivable, net.......................................................        55,841       39,236
  Inventories, net ..............................................................        39,385       42,780
  Income tax receivable..........................................................          --            334
  Deferred income taxes, net ....................................................         7,042         --
  Deferred financing costs.......................................................         1,384        1,372
  Prepaid expenses and other.....................................................         4,443        6,918
                                                                                    -----------     --------
        Total current assets.....................................................       172,909     $113,443

Molds, tools and equipment, net..................................................        17,226        7,005
Product and package design costs, net ...........................................         6,949        1,603
Goodwill and other intangibles, net .............................................       440,361      415,582
Income tax receivable ...........................................................         1,327        1,327
Deferred charges and other assets................................................         6,512        8,343
Deferred financing costs.........................................................         9,353        7,981
Deferred income taxes, net ......................................................          --           --
                                                                                    -----------     --------

        Total assets.............................................................   $   654,637     $555,284
                                                                                    ===========     ========

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
     AND STOCKHOLDERS' EQUITY
Current liabilities:

  Accounts payable...............................................................   $     9,613     $ 18,586
  Accrued expenses and other ....................................................        53,380       38,673
  Administrative claims payable..................................................         9,507        7,444
  Unsecured creditors payable ...................................................         8,490        7,000
                                                                                    ------------    --------
        Total current liabilities................................................        80,990       71,703
Senior notes.....................................................................       250,000      250,000
Deferred income taxes  ..........................................................         1,094          --
                                                                                    ------------    --------
        Total liabilities........................................................       332,084      321,703
                                                                                    ------------    --------
8% cumulative convertible exchangeable redeemable preferred stock, $.01 par
     value, 75,000,000 shares authorized, 18,677,460 issued and outstanding
     in 1999 and 20,216,941 issued and outstanding in  2000, liquidation
     preference $10 per share....................................................       186,790      202,185
                                                                                     -----------     -------

Stockholders' equity

Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued.......             --          --
Common stock, $.01 par value, 250,000,000 shares authorized, 40,951,241 issued
    and 33,557,241, outstanding in 1999 and 41,096,278 issued and 33,702,278
    outstanding in 2000..........................................................            409         411
Additional paid-in capital.......................................................        215,184     216,068
Deficit..........................................................................        (46,875)   (152,128)
                                                                                     ------------   ---------
        Total stockholders' equity before treasury stock.........................        168,718      64,351
Treasury stock, 7,394,000 shares.................................................        (32,955)    (32,955)
                                                                                     ------------    --------
        Total stockholders' equity ..............................................        135,763      31,396
                                                                                     ------------    --------

        Total liabilities, redeemable convertible preferred stock and
           stockholders' equity..................................................    $    654,637    $555,284
                                                                                     ============    ========
 .
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       F-3

<PAGE>




                            MARVEL ENTERPRISES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                                        ---------------------------
                                                                        1998          1999         2000
                                                                      ---------     ---------   --------
                                                                    (in thousands, except per share data)
<S>                                                                   <C>           <C>         <C>
Net sales.........................................................    $232,076      $319,645    $231,651
Cost of sales.....................................................     127,978       150,858     128,531
                                                                      ---------     --------    ---------
Gross profit......................................................     104,098       168,787     103,120
Operating expenses:                                                   ---------     --------    ---------
     Selling, general and administrative..........................      97,135       124,596     107,447
     Depreciation and amortization................................      19,332        18,078      30,651
     Amortization of goodwill and other intangibles...............       7,091        25,857      24,012
                                                                      ---------     --------    ---------
        Total expenses............................................      123,558      168,531     162,110
                                                                      ---------     --------    ---------
Operating (loss) income...........................................      (19,460)         256    (58,990)
Interest expense..................................................        9,440       32,077      31,901
Other income, net.................................................          676        4,043       4,223
                                                                      ---------     ---------   ----------
     Loss before income taxes.....................................      (28,224)     (27,778)    (86,668)
     Income tax expense ..........................................        4,386        4,482       2,927
        Equity in net loss of joint venture.......................           --           --        (263)
                                                                      ---------     ---------   ----------
        Net loss before extraordinary item........................    $ (32,610)    $(32,260)   $(89,858)
Extraordinary item, net of tax benefit of $1,021..................         --          1,531          --
                                                                      ---------     ---------   ----------
        Net loss..................................................    $ (32,610)    $(33,791)   $(89,858)
                                                                      ---------     ---------   ----------
Less: preferred dividend requirement..............................        3,380       14,220      15,395
                                                                      ---------     ---------   ----------
         Net loss attributable to Common Stock....................    $ (35,990)    $(48,011)   $(105,253)
                                                                      =========     =========   ==========
Basic and diluted net loss per common share:......................
   Net loss before extraordinary item.............................    $   (1.23)   $   (1.39)  $   (3.13)
   Extraordinary item.............................................         --      $   (0.04)  $      --
                                                                      ---------    ----------  ----------
   Net loss.......................................................    $   (1.23)   $   (1.43)  $   (3.13)
                                                                      =========    ==========  ==========
   Weighted average number of common shares outstanding.........         29,173         33,533    33,667


</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       F-4


<PAGE>




                            MARVEL ENTERPRISES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                              Common   Common   Additional  Retained
                                              Stock    Stock     Paid-In    Earnings    Treasury
                                              Shares   Amount    Capital    (Deficit)    Stock      Total
                                             --------  ------   --------   ----------  ---------    -----
                                                                (in thousands)
<S>                                          <C>       <C>      <C>        <C>         <C>          <C>
Balance at December 31, 1997................   27,746     277     70,578      37,126        --      107,981
Capital contribution........................       --      --      1,500        --          --        1,500
Capital transactions in connection with
   Acquisition..............................
        Issuance of common stock............   13,100     131    125,957        --          --      126,088
        Valuation of warrants...............       --      --     17,000        --          --       17,000
        Acquisition of treasury stock.......   (7,394)     --       --          --       (32,955)   (32,955)
Preferred dividend declared.................       --      --       --        (3,380)       --       (3,380)
Net loss....................................       --      --       --       (32,610)       --      (32,610)
                                             --------  ------   ---------   ----------  ---------   --------

Balance at December 31, 1998................   33,452    $408   $215,035      $1,136    $(32,955)   $183,624
Issuance of common stock....................      80       1        --         --           --             1
Exercise of stock purchase warrants.........      25       --       147        --           --           147
Stock warrants exercised by stockholders....      --       --         2        --           --             2
Preferred dividend declared.................      --       --       --       (14,220)       --       (14,220)
Net loss....................................      --       --       --       (33,791)       --       (33,791)
                                             --------  ------   ---------   ----------  ---------   ---------

Balance at December 31, 1999................  33,557    $ 409   $215,184    $(46,875)   $(32,955)   $135,763
                                             ========  ======   =========   ==========  =========   ========
Issuance of common stock.....................     80        1        499       --           --           500
Stock warrants exercised by stockholders.....     --       --          5       --           --             5
Employees' Stock Options Exercised.........       65        1        380       --           --           381
Preferred dividend declared.................      --       --        --      (15,395)       --       (15,395)
Net loss....................................      --       --        --      (89,858)       --       (89,858)
                                             --------  -------  ---------   ----------  ---------   ---------

Balance at December 31, 2000................   33,702   $ 411   $216,068    $(152,128)  $(32,955)    $31,396
                                             ========  =======  =========   ==========  =========   =========
</TABLE>



                 See Notes to Consolidated Financial Statements.

                                       F-5

<PAGE>

                            MARVEL ENTERPRISES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                           Years Ended December 31,
                                                                       -----------------------------
                                                                          1998        1999       2000
                                                                       ---------  ----------  --------
                                                                                (in thousands)
<S>                                                                    <C>        <C>         <C>
Net loss............................................................   $ (32,610) $(33,791)   $(89,858)
Adjustments to reconcile net loss to net cash provided
   by operating activities:
     Depreciation and amortization..................................      26,423    43,935      54,663
     Provision for doubtful accounts................................         409     1,721          81
     Deferred financing charges.....................................       2,596     2,888       1,384
     Deferred income taxes..........................................       7,494     2,922        --
     Extraordinary item, net........................................        --       1,531        --
     Changes in operating assets and liabilities:
          Accounts receivable.......................................      12,774    (7,544)     16,524
          Inventories...............................................      (7,317)   (6,798)     (3,395)
          Goodwill..................................................        --         --          798
          Income tax receivable.....................................      10,146     6,069        (334)
          Prepaid expenses and other................................       2,953      (774)     (2,475)
          Deferred charges and other assets.........................      (4,918)   (2,315)     (1,831)
          Equity in net loss of joint venture.......................        --         --          263
          Accounts payable, accrued expenses and other .............      24,034    (7,029)        (49)
                                                                       ---------  -----------  --------
Net cash provided by (used in) operating activities.................      41,984       815     (24,229)
                                                                       ---------  -----------  --------
Cash flow used in investing activities:

     Acquisition of Marvel Entertainment Group, net of cash received    (257,865)      --         --
     Payment of administrative claims, net..........................     (12,985)  (10,013)     (3,553)
     Net proceeds from sale of Fleer and settlement of Panini.......        --      11,980           0
     Purchases of molds, tools and equipment........................     (10,702)  (13,660)     (8,483)
     Expenditures for product and package design costs..............      (4,955)   (7,136)     (6,601)
     Patents........................................................     ( 1,668)     (181)        (31)
     Sale of Colorforms assets......................................       2,786       --         --
                                                                       ---------  -----------  --------
     Net cash used in investing activities..........................    (285,389)  (19,010)    (18,668)
                                                                       ---------  -----------  --------
Cash flow from financing activities:

     Proceeds from (payment of) bridge facility.....................     200,000  (200,000)        --
     Proceeds from senior notes offering, net of offering costs
          of $11,022................................................        --     238,978         --
     Exercise of stock options......................................        --         147         381
     Issuance of common stock.......................................        --           1         500
     Net repayments under credit agreement..........................     (12,000)      --          --
     Proceeds from capital contribution.............................       1,500       --          --
     Proceeds from preferred stock offering.........................      90,000       --          --
     Proceeds from exercise of stock warrants.......................        --         192           5
                                                                       ---------  -----------  --------
     Net cash provided by financing activities......................     279,500    39,318         886
                                                                       ---------  -----------  --------
     Net increase (decrease) in cash and cash equivalents...........      36,095    21,123     (42,011)
     Cash and cash equivalents at beginning of year.................       7,596    43,691      64,814
                                                                       ---------  -----------  --------
     Cash and cash equivalents at end of year.......................   $  43,691   $64,814     $22,803
                                                                       =========  ===========  ========
Supplemental disclosure of cash flow information:

     Interest paid during the period................................   $   5,302   $29,768     $30,348
     Net income taxes (recovered) paid during the year..............     (12,594)   (4,172)      1,333
Other non-cash transactions:
     Preferred stock dividends......................................       3,380    14,220      15,395

     Issuance of securities in connection with the acquisition of
        Marvel Entertainment Group, Inc., and treasury stock........     189,133       --         --
                 See Notes to Consolidated Financial Statements.

</TABLE>

                                       F-6

<PAGE>


                            MARVEL ENTERPRISES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2000

1.       Description of Business and Basis of Presentation

     The  Company  designs,  markets and  distributes  boys,  girls,  preschool,
activity  and  electronic  toys based on popular  entertainment  properties  and
consumer brand names. The Company also designs,  markets and distributes its own
line  of  proprietary  toys.  The  Company's  toy  business  is  conducted  both
domestically and internationally. Through its acquisition of MEG in 1998, one of
the  world's  most  prominent  character-based  entertainment  companies  with a
proprietary  library of over 4,700  characters,  the  Company  has  entered  the
licensing and comic book publishing businesses domestically and internationally.

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

     Toy Biz,  Inc.  was formed on April 30, 1993  pursuant  to a Formation  and
Contribution  Agreement ( "Formation Agreement "), entered into by a predecessor
company to Toy Biz, Inc. (the "Predecessor Company "), Mr. Isaac Perlmutter (the
sole stockholder of the Predecessor  Company),  MEG and Avi Arad ( "Mr. Arad ").
The  Predecessor  Company had been MEG's largest toy licensee.  The  Predecessor
Company was incorporated in 1990,  pursuant to an asset purchase  agreement with
Charan Industries, Inc.

     In  accordance  with  the  Formation  Agreement,  the  Predecessor  Company
contributed  all of its and an  affiliate's  assets  ($23,335,000)  and  certain
specified liabilities  ($21,949,000) to Toy Biz, Inc. for 44% of Toy Biz, Inc.'s
capital stock. Such specified liabilities included approximately $15,363,000 due
to Mr. Perlmutter and other affiliated  companies of the Predecessor  Company. A
portion  of the  assumed  liabilities  due to Mr.  Perlmutter  was  paid in cash
($8,752,000) and the remainder of the assumed  liabilities due to Mr. Perlmutter
was  converted  into  a  promissory  note  ($6,611,000).   MEG  made  a  capital
contribution of $500,000 for 46% of Toy Biz, Inc.'s capital stock and a loan, in
the form of a note,  of  $8,507,000.  In addition,  MEG granted Toy Biz, Inc. an
exclusive,  perpetual and paid up license to design and distribute toys based on
MEG  characters.  Pursuant  to the  Formation  Agreement,  in  exchange  for the
contribution  to Toy Biz,  Inc. of his interests in certain  license  agreements
with Toy Biz, Inc. and cash,  Mr. Arad received 10% of Toy Biz,  Inc.'s  capital
stock.  In addition,  Toy Biz, Inc.  granted Mr. Arad the Arad Stock Option (the
"Option") to acquire an additional 10% of Toy Biz,  Inc.'s  capital  stock.  Mr.
Arad also  agreed to enter  into the Arad  Consulting  Agreement  and the Master
License Agreement.

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

                                       F-7


<PAGE>



                            MARVEL ENTERPRISES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2000

      In accordance  with the Plan, the Toy Biz, Inc.  stockholders,  other than
MEG, immediately after the Reorganization  continued to own approximately 40% of
the outstanding  common stock of the Company  (assuming the conversion of all of
the shares of 8% Cumulative  Convertible  Exchangeable Preferred Securities (the
"8%  Preferred  Stock")  issued  by the  Company  pursuant  to the  Plan but not
assuming  the  exercise  of any  warrants  issued  pursuant to the Plan) and the
senior secured lenders of MEG received (i) approximately  $231.8 million in cash
and (ii) common and 8% Preferred Stock issued by the Company which (assuming the
conversion of all 8% Preferred Stock) represent  approximately 42% of the common
stock of the Company.  Investors  purchased  9.0 million  shares of 8% Preferred
Stock  that,  represent  approximately  18% of the common  stock of the  Company
(assuming the conversion of all 8% Preferred Stock).  Under the Plan, holders of
allowed  unsecured claims of MEG ("Unsecured  Creditors") will receive (i) up to
$8.0  million in cash and (ii)  between 1.0 million  and 1.75  million  warrants
having a term of four years and entitling  the holders to purchase  common stock
of the Company at $17.25 per share.  The exact amount of cash and warrants to be
distributed  to the Unsecured  Creditors  will be determined by reference to the
aggregate amount of allowed unsecured claims. In addition,  Unsecured  Creditors
will receive (i)  distributions  from any future recovery on certain  litigation
and (ii) a portion of the Stockholder Warrants as described below.  Finally, the
Plan provides that three other series of warrants (the  "Stockholder  Warrants")
will be distributed to the Unsecured  Creditors,  to former holders of shares of
MEG common  stock,  to holders of certain  class  securities  litigation  claims
arising in  connection  with the  purchase  and sale of MEG common  stock and to
LaSalle  National  Bank.  The  Stockholder  Warrants  consist of (a)  three-year
warrants to purchase 4.0 million shares of common stock of the Company at $12.00
per share, (b) six-month warrants to purchase 3.0 million shares of 8% Preferred
Stock for $10.65 per share  subject to increase  based upon the date of issuance
of the  six-month  warrants and (c)  four-year  warrants to purchase 7.0 million
shares of common stock of the Company at $18.50 per share. The recipients of the
Stockholder  Warrants  will also be entitled to receive  distributions  from any
future recovery on certain  litigation.  Certain other cash  distributions  were
also  provided  for by the  Plan in  connection  with  settling  certain  of the
disputes arising out of MEG's bankruptcy.

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

                                       F-8


<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     The  preliminary  purchase  price of MEG,  including  related fees,  net of
liabilities   assumed,   was   approximately   $446.9   million  which  included
approximately  $257.9  million in cash and the  remainder in  securities  of the
Company  as  outlined  above,  net of  shares  of the  Company  owned by MEG and
reacquired  in  these  transactions.  Goodwill  from  the  acquisition  will  be
amortized over 20 years.

     During 1999,  the Company  finalized  certain  preliminary  portions of the
purchase  price  allocation  relating to its  acquisition of MEG. The final fair
value of the assets and liabilities acquired is summarized below.

<TABLE>
<CAPTION>
                                                                  (in thousands)
                              <S>                                  <C>
                              Current assets...................    $ 42,851
                              Non-current assets...............       4,971
                              Goodwill and other intangible
                                   Assets.........................  462,180
                              Current liabilities..............     (55,952)
                              Non-current liabilities..........     (11,180)
                                                                   ---------
                                                                   $ 442,870
</TABLE>

     In the  preliminary  allocation  of the  purchase  price as of December 31,
1998, Fleer/SkyBox  ("Fleer"),  MEG's subsidiaries engaged in the sale of sports
and entertainment trading cards, was presented as an asset held for sale and the
Company's maximum liability relating to Panini  S.p.A.("Panini"),  MEG's Italian
subsidiary  engaged  in the  children's  activity  sticker  and  adhesive  paper
business,  was presented as a long-term  liability on the  consolidated  balance
sheet as of December 31, 1998. In February 1999, the Company sold  substantially
all of the  assets of Fleer for  approximately  $23.2  million,  in cash,  after
adjustments   and  assumption  of  certain   liabilities.   Proceeds  from  this
transaction  were partially used to repay the bridge facility with the remainder
used for working  capital  purposes.  On October 8, 1999,  the Company  received
nominal  consideration for its equity interest in Panini. In connection with the
sale,  the Company made a payment to Panini's  secured  lenders of $11.2 million
and obtained a release from the maximum liability,  a $27.0 million guarantee of
Panini's debt in favor of such secured lenders.

     The completion of the purchase  price  allocation in 1999 resulted in a net
decrease in goodwill of $21,694.  The Company's  results of  operations  for the
periods presented do not include the results of operations of Fleer and Panini.

     Presented  below are the unaudited pro forma results of the Company  giving
effect to the acquisition of MEG as if it had occurred as of January 1, 1997:

                                       F-9

<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

<TABLE>
<CAPTION>


                                                      For the Year Ended
                                                         December 31,
                                                     --------------------
                                                          1997     1998
                                                        --------  -------
                                                       (in millions, except
                                                            per share)
            <S>                                         <C>       <C>
            Net sales..........................         $ 220.3   $274.5
            Operating loss.....................           (79.4)   (33.9)
            Net loss...........................           (96.1)   (81.0)
            Basic and diluted loss per share...           (3.28)   (2.82)

</TABLE>

2.   Summary of Significant Accounting Policies

Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its  subsidiaries,  except for Panini  and Fleer . Upon  consolidation,  all
significant intercompany accounts and transactions are eliminated.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  The principal  areas of judgement  relate to provisions  for
returns,  other sales  allowances and doubtful  accounts,  the  realizability of
inventories,  goodwill and other intangible  assets,  and the impairment reserve
for minimum royalty guarantees and minimum advances, molds, tools and equipment,
and product and package  design  costs.  Actual  results could differ from those
estimates.

Cash Equivalents

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

Inventories

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

                                      F-10

<PAGE>




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

Molds, Tools, and Equipment

     Molds, tools and equipment are stated at cost less accumulated depreciation
and amortization. The Company owns the molds and tools used in production of the
Company's products by third-party  manufacturers.  At December 31, 2000, certain
of these costs  related to products  that were not yet in production or were not
yet being sold by the Company.  For financial reporting  purposes,  depreciation
and  amortization  is  computed by the  straight-line  method  generally  over a
three-year period (the estimated selling life of related products) for molds and
tooling  costs and over the useful life for  furniture  and  fixtures and office
equipment. On an ongoing basis, the Company reviews the lives and carrying value
of molds and  tools  based on the sales and  operating  results  of the  related
products.  If the facts and circumstances suggest a change in useful lives or an
impairment in the carrying value,  the useful lives are adjusted and unamortized
costs are written off accordingly. Write-offs, in excess of normal amortization,
which are included in depreciation and amortization for the years ended December
31, 1998, 1999 and 2000 were approximately $1,418,000,  $146,000 and $9,205,000,
respectively.

Product and Package Design Costs

      The Company  capitalizes  costs related to product and package design when
such products are determined to be commercially acceptable. Product design costs
include  costs  relating  to the  preparation  of  precise  detailed  mechanical
drawings and the  production of  sculptings  and other  handcrafted  models from
which molds and dies are made.  Package  design costs include costs  relating to
art work, modeling and printing separations used in the production of packaging.
At December 31, 2000,  certain of these costs  related to products that were not
yet in  production  or were not yet being  sold by the  Company.  For  financial
reporting  purposes,  amortization  of product and package design is computed by
the  straight-line  method  generally  over a three-year  period (the  estimated
selling life of related products).  On an ongoing basis, the Company reviews the
useful lives and carrying value of product and package design costs based on the
sales  and  operating  results  of  the  related  products.  If  the  facts  and
circumstances  suggest a change in useful lives or an impairment in the carrying
value,  the useful  lives are  adjusted  and  unamortized  costs are written off
accordingly. Write-offs, in excess of normal amortization, which are included in
amortization  for  the  years  ended  December  31,  1998,  1999  and  2000  was
approximately $1,425,000, $486,000 and $7,585,000 respectively.

Goodwill and Other Intangibles

     Goodwill  and  other  intangibles  are  stated  at  cost  less  accumulated
amortization.  Goodwill  is  principally  amortized  over  20  years  and  other
intangibles  are amortized over 3 to 10 years.  For the years ended December 31,
1998,  1999 and  2000,  amortization  of  goodwill  and  other  intangibles  was
approximately $7,091,000, $25,857,000 and $24,012,000, respectively.

                                      F-11

<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

Long-Lived Assets

     In accordance with Financial  Accounting Standards Board ("FASB") Statement
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company records  impairment  losses on long-lived
assets  used  in  operations,  including  intangible  assets,  when  events  and
circumstances  indicate  that the assets might be impaired and the  undiscounted
cash flows  estimated to be generated by those assets are less than the carrying
amounts of those assets.

Deferred Financing Costs

     Deferred  financing  costs,  which are  mainly  costs  associated  with the
Company's Senior Notes, are amortized over the term of the related agreements.

Research and Development

     Research  and  development  ("R&D")  costs are  charged  to  operations  as
incurred.  For the years ended  December 31, 1998,  1999 and 2000,  R&D expenses
were $4,498,000, $6,366,000 and $13,157,000 respectively.

Revenue Recognition

     Sales are recorded upon shipment of merchandise  and a provision for future
returns  and  other  sales  allowances  is  established  based  upon  historical
experience  and  management  estimates.  In  certain  cases,  sales  made  on  a
returnable  basis are recorded net of provisions  for estimated  returns.  These
estimates  are revised as  necessary  to reflect  actual  experience  and market
conditions.

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

     Income from  distribution  fees,  licensing and sub-licensing of characters
owned by the Company are recorded in accordance with the distribution  agreement
and at the time  characters  are  available to the licensee  and  collection  is
reasonably assured. Receivables from licensees due more than one year beyond the
balance sheet date are  discounted to their present  value.  For the years ended
December  31,  1998,  1999 and 2000,  toy  distribution  fees and  sub-licensing
revenues were $1,250,000, $337,000 and $0 respectively.

                                      F-12

<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

Advertising Costs

     Advertising  production costs are expensed when the  advertisement is first
run. Media  advertising costs are expensed on the projected unit of sales method
during interim  periods.  For the years ended December 31, 1998,  1999 and 2000,
advertising   expenses   were   $31,762,000,    $39,267,000   and   $36,211,000,
respectively.  At December 31, 1999 and 2000 the Company had incurred $1,307,000
and $9,000,  respectively,  of prepaid advertising costs, principally related to
production  of  advertisement  that will be first  run in fiscal  2000 and 2001,
respectively.

Royalties

     Minimum  guaranteed  royalties,  as well as  royalties in excess of minimum
guarantees,  are expensed based on sales of related products.  The realizability
of advanced  minimum  guarantees  paid is evaluated by the Company  based on the
projected sales of the related products.

Income Taxes

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

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

Foreign Currency Translation

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

Fair Value of Financial Instruments

     The estimated fair value of certain of the Company's financial instruments,
including cash and cash equivalents,  accounts receivable,  accounts payable and
accrued  expenses  approximate  their carrying  amounts due to their  short-term
maturities.

     The estimated fair values of the Company's  Senior Notes and outstanding 8%
Preferred Stock is based on market prices, where available or dealer quotes. The
carrying  amounts and estimated fair values of these financial  instruments were
as follows:

<TABLE>
<CAPTION>

                                                December 31, 1999         December 31, 2000
                                                -------------------       -------------------
                                                Carrying  Estimated      Carrying  Estimated
                                                Amounts   Fair Value     Amounts   Fair Value
                                                --------  ----------     --------  ----------
                        <S>                     <C>       <C>            <C>       <C>
                        Senior Notes.........   $250,000  $226,000       $250,000  $ 92,250
                        8% Preferred Stock...    186,790   149,420        202,185    35,380
</TABLE>


                                      F-13



<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

Concentration of Risk

     A large number of the  Company's  toy products are  manufactured  in China,
which  subjects  the  Company  to  risks  of  currency  exchange   fluctuations,
transportation delays and interruptions, and political and economic disruptions.
The  Company's  ability to obtain  products  from its Chinese  manufacturers  is
dependent  upon the United  States'  trade  relationship  with China.  The "most
favored nation" status of China, which is reviewed annually by the United States
government,  is a regular topic of political dialogue. The loss of China's "most
favored  nation"  would  increase  the cost of  importing  products  from  China
significantly, which could have a material adverse effect on the Company.

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

Loss Per Share

     In accordance  with SFAS No. 128 "Earnings Per Share",  basic  earnings per
share is computed by dividing net income (loss) available to common stockholders
by the weighted average number of shares of common stock outstanding  during the
year.  The  computation  of  diluted  earnings  per  share  is  similar  to  the
computation  of basic loss per share,  except the number of shares is  increased
assuming the exercise of dilutive  stock options and warrants and other dilutive
securities using the treasury stock method, unless the effect is anti-dilutive.

Comprehensive Income

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS 130"), Reporting Comprehensive Income. The Company's adoption of SFAS
130 had no effect on the Company as the Company does not have any  comprehensive
income items.

Recent Accounting Pronouncements

     SFAS No. 133, ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES
- In June  1998,  the  Financial  Standards  Board  issued  Statement  No.  133,
Accounting for Derivative Instruments and Hedging Activities,  which is required
to be adopted  beginning in fiscal 2000.  The statement will require the Company
to recognize all  derivatives  on the balance  sheet at fair value.  Derivatives
that are not hedges  must be  adjusted  to fair  value  through  income.  If the
derivative  is a hedge,  depending  on the nature of the hedge,  changes in fair
value of  derivatives  will either be offset against the change in fair value of
the  hedged  assets,  liabilities,  or  firm  commitments  through  earnings  or
recognized in other comprehensive  income until the hedged item is recognized in
earnings.  Management does not anticipate that the adoption of the new Statement
will have a  significant  effect on  earnings or the  financial  position of the
Company.

                                      F-14




<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     SOP 98-1,  ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE  DEVELOPED OR OBTAINED
FOR INTERNAL USE is required to be adopted by the Company as of January 1, 2000.
The Company's  current  policy falls within  guidelines of SOP 98-1.  Also,  SOP
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES is required to be adopted by
the Company as of January 1, 1999.  Management believes that the adoption of SOP
98-5 will not have a material impact on the Company's financial statements.

     SAB NO.101, Revenue Recognition in Financial Statements

     The  Securities  and Exchange  Commission  (SEC)  issued  Staff  Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements,  in December 1999
and updated the  bulletin in 2000.  The new standard  was  effective  January 1,
2000,  with  implementation  required  by  the  fourth  quarter  of  2000.  This
pronouncement  summarizes the SEC's views of revenmue  recognition  practices in
financial  statements  and how  they  apply  to  generally  accepted  accounting
principles.  Adoption of SAB101 did not have a material  impact on the Company's
financial statements.

Reclassifications

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

3.   Assets Held for Resale

      Shortly after the acquisition of MEG, the Company concluded that Fleer did
not fit the Company's  long-term  strategy and the Company decided to dispose of
this  operation.  On February 11, 1999,  the Company sold  substantially  all of
Fleer's assets for  approximately  $23.2 million in cash, after  adjustments and
assumptions of certain liabilities.  $15.0 million of the proceeds were utilized
to repay the Bridge Facility. The Company remains liable under certain contracts
of the Fleer business and has been  indemnified  against such liabilities by the
purchaser of such business.  In its preliminary  purchase price allocation,  the
Company estimated the fair value of Fleer's net assets to be $26.0 million.  The
difference  between this amount and the actual  proceeds was accounted for as an
adjustment to goodwill.

                                      F-15



<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

4.   Details of Certain Balance Sheet Accounts
<TABLE>
<CAPTION>

                                                                             December 31,
                                                                        ----------------------
                                                                           1999        2000
                                                                        -----------  ---------
                                                                            (in thousands)
<S>                                                                     <C>          <C>
Accounts receivable, net, consists of the following:

   Accounts receivable................................................  $ 84,353     $ 63,171
   Less allowances for:
     Doubtful accounts................................................    (3,951)      (4,542)
     Advertising, markdowns, returns, volume discounts and other......   (24,561)     (19,393)
                                                                        ----------   ---------

          Total.......................................................  $ 55,841     $ 39,236
                                                                        ==========   =========
Inventories, net, consist of the following:
   Toys:
     Finished goods...................................................  $ 31,397     $ 31,026
     Component parts, raw materials and work-in-process...............     4,787        8,001
                                                                        ----------   ---------
          Total Toys..................................................    36,184       39,027
   Publishing:
     Finished goods...................................................        --          298
     Editorial and raw materials......................................     3,201        3,455
                                                                        ----------   ---------
          Total publishing............................................     3,201        3,753
                                                                        ----------   ---------
          Total.......................................................  $ 39,385     $ 42,780
                                                                        ==========   =========
Molds, tools and equipment, net, consists of the following:

   Molds, tools and equipment.........................................  $ 23,047     $ 31,060
   Office equipment and other.........................................    10,189       10,163
   Less accumulated depreciation and amortization.....................   (16,010)     (34,218)
                                                                        ----------   ---------
          Total.......................................................  $ 17,226     $  7,005
                                                                        ==========   =========
Product and package design costs, net, consists of the following:

   Product design costs...............................................  $  8,856     $ 13,065
   Package design costs...............................................     3,868        6,248
   Less accumulated amortization......................................    (5,775)     (17,710)
                                                                        ----------   ---------
          Total.......................................................  $  6,949     $  1,603
                                                                        ==========   =========

Goodwill and other intangibles, net, consists of the following:

   Goodwill...........................................................  $470,729     $469,683
   Patents and other intangibles......................................     3,902        3,933
   Less accumulated amortization......................................   (34,270)     (58,034)
                                                                        ----------   ---------
          Total.......................................................  $440,361     $415,582
                                                                        ==========   =========

Accrued expenses and other consists of the following:

   Accrued advertising costs..........................................   $ 6,787     $  6,802
   Accrued royalties..................................................     8,197        6,064
   Inventory purchases................................................     5,547        3,630
   Income taxes payable...............................................     4,366        5,070
   Deferred income taxes .............................................     5,948          --
   Litigation Trust accrual...........................................       675          --
   Other accrued expenses.............................................    21,860      17,107
                                                                        -----------  ---------
          Total.......................................................  $ 53,380     $ 38,673
                                                                        ===========  =========

</TABLE>

                                      F-16



<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

5.   Debt Financing

     To partially  finance the acquisition of MEG, the Company obtained a $200.0
million loan (the "Bridge  Facility")  from UBS AG,  Stamford Branch ("UBS AG").
The Bridge Facility bore interest at either the bank's base rate (defined as the
higher of the prime rate or the sum of 1/2 of 1% plus the  Federal  Funds  Rate)
plus 5.50% or at the  Eurodollar  rate plus 6.50%.  On September  28, 1998,  the
Company and UBS AG entered an agreement  for a $50.0  million  Revolving  Credit
Facility ("UBS Credit Facility").  The Company incurred a commitment fee for the
Bridge Facility and the UBS Credit Facility.

     The UBS Credit  Facility  bore  interest  at either  the  bank's  base rate
(defined  as the  higher  of the  prime  rate or the  sum of 1/2 of 1% plus  the
Federal Funds Rate) plus a margin  ranging from 0.75% to 1.25%  depending on the
Company's financial  performance or at the Eurodollar rate plus a margin ranging
from 1.75% to 2.25% depending on the Company's  financial  performance.  The UBS
Credit Facility  required the Company to pay a commitment fee of 0.50% per annum
on the average daily unused  portion of the  facility.  There were no borrowings
under the UBS Credit  Facility.  UBS's  commitment  to  advance  funds and issue
letters of credit under the UBS Credit  Facility was terminated  effective as of
February 3, 1999.

     The Bridge  Facility and the UBS Credit Facility were secured by all of the
Company's assets (other than Panini) and contained various financial  covenants,
as  well  as  restrictions  on  new   indebtedness,   acquisitions  and  similar
investments,  the sale or transfer of assets,  capital expenditures,  restricted
payments, payment of dividends, issuing guarantees and creating liens.

         On February 25, 1999, the Company  completed a $250.0 million  offering
of senior  notes  (the  "Senior  Notes")  in a  private  placement  exempt  from
registration  under the Securities Act of 1933 ("the Act") pursuant to Rule 144A
under the Act. Net proceeds of approximately $239.0 million were used to pay all
outstanding  balances  under the Bridge  Facility and for working  capital.  The
Senior  Notes are due June 15,  2009 and bear  interest  at 12% per  annum.  The
Senior Notes may be redeemed  beginning June 15, 2004 for a redemption  price of
106% of the  principal  amount,  plus accrued  interest.  The  redemption  price
decreases 2% each year after 2004 and will be 100% of the principal amount, plus
accrued  interest,  beginning on June 15, 2007.  In addition,  35% of the Senior
Notes may, under certain circumstances, be redeemed before June 15, 2002 at 112%
of the principal amount,  plus accrued  interest.  Principal and interest on the
Senior Notes are  guaranteed  on a senior basis jointly and severally by each of
the Company's domestic  subsidiaries.  On August 20, 1999, the Company completed
an exchange  offer under which it exchanged  virtually  all of the Senior Notes,
which  contained  restrictions  on transfer,  for an equal  principal  amount of
registered,  transferable  notes whose terms are identical in all other material
respects to the terms of the Senior Notes.

         In  February  1999,  in  connection  with the  repayment  of the Bridge
Facility and the termination of the UBS Credit Facility, the Company recorded an
extraordinary  charge of approximately $1.5 million,  net of tax benefit for the
write-off of deferred financing costs associated with these two facilities.

                                      F-17



<PAGE>




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     On April 1, 1999, the Company and Citibank,  N.A.  ("Citibank")  entered an
agreement  for a $60.0  million  Revolving  Credit  Facility  ("Citibank  Credit
Facility").  The Citibank  Credit  Facility  bears interest at either the bank's
base rate  (defined as the higher of the prime rate or the sum of 1/2 of 1% plus
the Federal Funds Rate) plus a margin  ranging from 0.75% to 1.25%  depending on
the Company's  financial  performance  or at the  Eurodollar  rate plus a margin
ranging from 2.25% to 2.75%  depending on the Company's  financial  performance.
The Citibank  Credit  Facility  requires the Company to pay a commitment  fee of
0.625% per annum on the average  daily  unused  portion of the  facility  unless
there is at least $20.0 million outstanding borrowings in which case the rate is
0.50% per annum for the amount  outstanding above $20.0 million.  In March 2000,
the parties  agreed to an amendment  whereby  financial  covenants  would not be
tested as long as the total amount outstanding does not exceed $20.0 million and
the borrowing base less the total outstanding  amount exceeds $20.0 million.  In
April 2000, the parties agreed to reduce the Citibank  Credit  Facility to $40.0
million.  In August 2000, the parties agreed to an amendment  whereby  financial
covenants would not be tested as long as the total amount  outstanding  does not
exceed $20.0 million and the borrowing  base less the total  outstanding  amount
exceeds $10.0 million during June, July and August 2000 and $20.0 million at all
other times.  In addition,  the  amendment  requires the  re-negotiation  of the
financial  covenants once financial  projections are provided to the Lender. The
Company  has not  borrowed  under  the  Citibank  Credit  Facility.  The  amount
available  under this facility,  $31,589,000,  has been reduced by the amount of
letters of credit outstanding, which is approximately $14,615,000 as of December
31,  2000.  The  Citibank  Credit  Facility  is  secured by a lien on all of the
Company's inventory and receivables.

     The  interest  rates for  borrowings  as of December  31, 1999 and 2000 was
12.00% and 12.00%, respectively and the weighted average interest rates for 1999
and 2000 were 12.02% and 12.00%,  respectively.  The maximum amounts outstanding
during  1998,  1999 and 2000 were  $200.0  million,  $250.0  million  and $250.0
million, respectively.

     The interest expense,  including amortization of Bridge Facility commitment
fees and other costs in 1998 and 1999,  for the years ended  December  31, 1998,
1999 and 2000 were $9,440,000, $32,077,000 and $31,901,000 respectively.

6.   Stockholders' Equity

     On September 11, 1998, the Company's  stockholders  approved changes in the
Company's  capital  structure in connection with the approval of the Plan. These
changes  eliminated  the Class B Common Stock,  authorized  an additional  150.0
million shares of common stock (for a maximum authorized amount of 250.0 million
shares) and authorized 100.0 million shares of preferred  stock,  including 75.0
million shares of 8% Preferred  Stock and 25.0 million shares of preferred stock
with a $.01 par value.

     The  8%  Preferred   Stock  is  convertible   into  1.039  fully  paid  and
non-assessable shares of common stock of the Company. The Company is required to
redeem all  outstanding  shares of the 8% Preferred  Stock on October 1, 2011 at
$10.00 per share plus all accrued and unpaid  dividends.  The 8% Preferred Stock
generally  votes together with the common stock on all matters.  The Company has
the option to pay the  dividend in cash or  additional  8% Preferred  Stock.  On
March 31, June 30,  September  30 and  December  31,  2000,  the Company  issued
373,528,  380,982,  388,603 and 396,372  shares,  respectively,  of 8% Preferred
Stock in payment of dividends  declared and payable to stockholders of record on
those dates.

                                      F-18



<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     The Company  issued the following  securities in accordance  with the Plan:
(a) 7.9  million  shares  of 8%  Preferred  Stock to MEG  fixed  senior  secured
lenders, (b) 9.0 million shares of 8% Preferred Stock to new investors at $10.00
per  share,  (c) 13.1  million  shares of common  stock to the MEG fixed  senior
secured lenders, (d) four-year warrants to purchase up to 1.75 million shares of
common  stock at $17.25 per share,  (e)  three-year  warrants  to  purchase  4.0
million  shares of common stock at $12.00 per share,  (f) six-month  warrants to
purchase 3.0 million  shares of preferred  stock for $10.65 per share subject to
increase  based upon the date of issuance  of the  six-month  warrants,  and (g)
four-year  warrants to purchase 7.0 million shares of common stock at $18.50 per
share.

<TABLE>
<CAPTION>
     <S>                                                                                              <C>
     As of December 31, 2000, the Company had reserved shares of common stock
      for issuance as follows:
         Conversion of 8% preferred stock.........................................................    21,005
         Exercise of common stock purchase warrants...............................................    12,750
         Exercise of common stock options.........................................................    5,073
                                                                                                      -------
                                                                                             Total    38,828
</TABLE>


     In connection  with the Plan, the Company  received a $1.5 million  capital
contribution  from an affiliate of Mr.  Perlmutter and Mr. Arad. Mr.  Perlmutter
and Mr. Arad received no additional equity for such contribution.


7.   Stock Option Plans

     Under the terms of the Company's 1998 Stock Incentive Plan (the "1998 Stock
Incentive Plan"),  incentive stock options,  non-qualified stock options,  stock
appreciation rights,  restricted stock, performance units and performance shares
may be granted to officers, employees,  consultants and directors of the Company
and its  subsidiaries.  In  November  1998,  the  Company  authorized  a maximum
aggregate number of shares of Common Stock as to which options and rights may be
granted under the Stock Incentive Plan of 6.0 million shares,  including options
described  below.  All  options  granted  and  outstanding  under the  Company's
previous  stock  incentive  plan (the "1995 Stock Option Plan") and all previous
stock option plans of MEG were canceled at or prior to the  consummation  of the
Plan on October 1, 1998.

                                      F-19





<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     Information  with  respect to options  under the stock  option plans are as
follows:
<TABLE>
<CAPTION>


                                                                                    Weighted
                                                                                    Average
                                                               Option Price per     Exercise
                                                     Shares         Share            Price
                                                   ---------   ------------------   ---------
<S>                                                <C>         <C>                  <C>
Outstanding at December 31, 1997...............      632,886        $15.00-$22.63
Canceled.......................................     (632,886)                         $17.92
Exercised......................................         --                               --
Granted (under 1998 Stock Incentive Plan)...       3,551,000                           $6.05
                                                   ---------
Outstanding at December 31, 1998...............    3,551,000         $5.88-$ 6.25
Canceled.......................................     (379,250)                          $6.06
Exercised......................................      (25,000)                          $5.88
Granted........................................    2,138,000                           $6.47
                                                   ---------
Outstanding at December 31, 1999...............    5,284,750         $5.00-$ 7.25
Canceled.......................................     (763,250)                          $6.13
Exercised......................................      (64,750)                          $5.88
Granted........................................      616,000                           $5.63
                                                   ---------
Outstanding at December 31, 2000...............    5,072,750         $4.19-$ 7.38      $6.21
                                                   =========
Exercisable at December 31, 2000                   2,598,167         $5.00-$ 7.25      $6.18
                                                   =========

</TABLE>

     Options  granted  under  the  Stock  Incentive  Plan in 1999 and 2000  vest
generally  in three equal  installments  beginning  12 months  after the date of
grant.  Options  granted  in 1998  vest  generally  in four  equal  installments
beginning  with the date of the grant.  At December 31, 2000,  1,884,750  shares
were  available for future  grants of options and rights.  At December 31, 2000,
the weighted average  remaining  contractual life of the options  outstanding is
7.02 years.

     The Company  accounts for its stock  options  under  Accounting  Principles
Board Opinion No. 25,  "Accounting for Stock Issued to Employees" ("APB 25") and
related  Interpretations.  Under  APB 25,  because  the  exercise  price  of the
Company's employee stock options equals the market price of the underlying stock
on date of grant, no compensation expense is recognized. The Company has elected
to  follow  the  disclosure-only   provisions  under  FASB  Statement  No.  123,
"Accounting for Stock-Based  Compensation," ("FAS 123"). For the purposes of FAS
123 pro forma disclosures,  the estimated fair value of the options is amortized
to expense over the options' vesting period. The Company's pro forma information
follows:

                                      F-20






<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 2000
<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                                 -----------------------------------
                                                                                 1998          1999        2000
                                                                                 --------    --------   -----------
                                                                                (in thousands, except per share data)
<S>                                                                              <C>         <C>        <C>

Net loss, as reported........................................................    $(32,610)   $(33,791)  $ (89,858)
Pro forma net loss...........................................................     (35,679)    (39,214)    (94,972)
Pro forma net loss per share attributable to Common Stock--basic
   And diluted...............................................................       (1.34)     ( 1.59)      (2.82)

</TABLE>

     The fair  value for each  option  grant  under the stock  option  plans was
estimated at the date of grant using a  Black-Scholes  option pricing model with
the following  weighted-average  assumptions  for the various grants made during
1995 and 1996: risk free interest rates ranging from 5.26% to 7.19%; no dividend
yield;  expected  volatility of 0.354; and expected lives of three years to five
years. The weighted  average  assumptions for the 1998 grants are: 6.0% interest
rate; no dividend  yield;  expected  volatility  of 0.567;  and expected life of
three years. The weighted average assumptions for the 1999 grants are: risk free
interest  rates  ranging  from  5.19% to  6.36%;  no  dividend  yield;  expected
volatility  of 0.553;  and expected  life of three years.  The weighted  average
assumptions  for the 2000 grants are risk free interest rates ranging from 6.12%
to 6.72%: no dividend yield:  expected volatility of 0.550: and expected life of
three years.  The option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  the option  valuation  model  requires the input of
highly  subjective  assumptions  including the expected stock price  volatility.
Because the Company's employee stock options have characteristics  significantly
different from those traded options, and because changes in the subjective input
assumptions  can  materially  affect the fair  value  estimate  in  management's
opinion,  the  existing  model does not  necessarily  provide a reliable  single
measure of the fair value of its employee stock options.

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

8.    Joint Venture

     The Company has entered into a jointly owned limited  partnership with Sony
Pictures  in order to pursue  licensing  opportunities  for motion  picture  and
television  related  merchandise  relating  to  the  Spider-Man  character.  The
Company's  share of marketing  and  promotional  expenses for the twelve  months
ended December 31, 2000 totals approximately $263,000.

9.   Sales to Major Customers and International Operations

     The Company primarily sells its merchandise to major retailers, principally
throughout the United  States.  Credit is extended based on an evaluation of the
customer's financial condition and generally, collateral is not required. Credit
losses are provided for in the financial  statements and have been  consistently
within  management's  expectations.  In 1997, the Marvel bankruptcy and concerns
among retailers  about the future of the Marvel brand caused  customers to claim
higher than expected return and other sales allowances.

             During the year ended December 31, 1998, three customers  accounted
for approximately 23%, 15% and 10%

                                      F-21



<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     of total net toy sales.  During the year ended  December  31,  1999,  three
customers  accounted for approximately  29%, 18% and 11% of total net toy sales.
During  the  year  ended  December  31,  2000,  three  customers  accounted  for
approximately 26%, 15 % and 8% of total net toy sales.

     The Company's  Hong Kong  subsidiary  supervises the  manufacturing  of the
Company's products in China and sells such products  internationally.  All sales
by the Company's Hong Kong subsidiary are made F.O.B.  Hong Kong against letters
of  credit.   During  the  years  ended  December  31,  1998,   1999  and  2000,
international  sales were  approximately  16%, 15%, and 28 %,  respectively,  of
total net toy sales.  During the years ended  December 31, 1998,  1999 and 2000,
the Hong Kong operations reported operating income of approximately  $1,534,000,
$5,055,000  and  $7,198,000  and  income  before  income  taxes  of  $1,884,000,
$5,472,000  and  $7,410,000,  respectively.  At December 31, 1999 and 2000,  the
Company had assets in Hong Kong of  approximately  $35,997,000 and  $40,356,000,
respectively.  The Hong Kong subsidiary represented $31,926,000 and $38,057,000,
respectively,  of the Company's  consolidated retained earnings during the years
ended December 31, 1999 and 2000.

10.   Restructuring and Other Unusual Costs

     2000 Product Discontinuance

     In  connection  with the  discontinuance  of certain  categories of its toy
business,  in an effort to  position it for  improved  financial  and  operating
performance,  the Company recorded approximately $22.9 million in charges in the
fourth  quarter of 2000.  These  charges  related  primarily  to  reductions  of
inventory to net realizable value,  write-offs of moulds,  tools and product and
package design costs. These costs are reflected in the following captions in the
statement of operations.

<TABLE>
<CAPTION>

                                             (in thousands)
     <S>                                        <C>
     Net sales (allowances)................     $   1,500
     Cost of sales.........................         3,800
     Selling general and administrative....           775
     Depreciation and amortization.........        16,790
                                                ---------
                                                $  22,865
</TABLE>

     1998 Restructuring

     In  connection  with the  consummation  of the Plan in  1998,  the  Company
reviewed  its  relationships  with  its  foreign  distributors,  as  well as the
Company's relationship with certain suppliers,  for business conflicts.  As part
of  integrating  MEG's  operations  with  those  of  the  Company,  the  Company
reevaluated its international licensing and product distribution  relationships.
In  addition,  certain  products  that were at  various  stages  of  design  and
marketing were discontinued and written-off  because of business  conflicts that
arose out of the acquisition of MEG.

     As a result of the above  matters,  the  Company  recorded  allowances  and
unusual charges of  approximately  $16.8 million for the year ended December 31,
1998,  which relate to impairment of assets,  severance costs and the settlement
of litigation that arose in prior years regarding a licensing  agreement.  These
costs are reflected in the following captions in the statement of operations.

                                      F-22




<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000
<TABLE>
<CAPTION>


                                            (in thousands)
     <S>                                       <C>
     Net sales (allowances)................    $    2,925
     Cost of sales.........................         1,193
     Selling general and administrative....        11,676
     Depreciation and amortization.........         1,032
                                               ----------
                                               $   16,826

     Cash charges..........................    $    3,400
     Non-cash charges......................        13,426
                                               ----------
                                               $   16,826

</TABLE>

     Of these costs,  approximately  $14.9 million and $1.9 million were charged
to the third and fourth quarters,  respectively, of fiscal 1998. At December 31,
1999,  $600,000 of the cash charges  remain  unpaid.  At December 31, 2000,  all
charges were fully paid for.

11.   Income Taxes

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

<TABLE>
<CAPTION>

                                        Years Ended December 31,

                                      1998         1999       2000
                                     -------      -------   -------
                                            (in thousands)
<S>                                  <C>          <C>        <C>
Current:

     Federal .                       $ (6,189)     $ (146)   $ -----
     State....................            410          534       431
     Foreign .                            824        1,172     1,698
                                     --------      ------    -------
                                     $ (4,955)     $ 1,560   $ 2,129
                                     ---------     -------   -------
Deferred:

     Federal .                       $  6,025      $ 2,794   $   642
     State....................          3,316          128       156
                                     --------      -------   -------
                                        9,341        2,922       798
                                     --------      -------   -------
Income tax (benefit) expense .....   $  4,386      $ 4,482   $ 2,927
                                     ========      =======   =======


</TABLE>






                                      F-23


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

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


                                                                   Years Ended December 31,
                                                                    1998      1999       2000
                                                                 ----------   -------  -------
<S>                                                              <C>         <C>      <C>
Federal income tax provision computed at the statutory rate.....     (35.0)%  (35.0)%   (35.0)%
State taxes, net of Federal income tax effect...................      (4.7)%    1.9%      0.4%
Non-deductible amortization expense.............................       7.9%    30.0%      9.2%
Foreign taxes...................................................       --       2.9%      1.5%
Purchase accounting.............................................       --      17.1%     (2.1)%
Increase in valuation allowance.................................      48.6%      --      29.7%
Other...........................................................      (1.3)%    (0.8)%   (0.3)%
                                                                  -----------  -------  -------
Total provision for income taxes................................      15.5%     16.1%      3.4%
                                                                  ===========  =======  =======
</TABLE>

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

<TABLE>
<CAPTION>

                                                             December 31,
                                                           1999       2000
                                                          -------    --------
                                                            (in thousands)
         <S>                                              <C>        <C>
         Deferred tax assets:
              Accounts receivable ......................  $ 5,159    $  4,933
              Inventory.................................    6,192       9,029
              Sales returns reserves....................    2,014       1,736
              Employment reserves.......................    4,017       4,091
              Restructuring and other reserves..........    1,433       1,505
              Reserve related to foreign investments....    3,546       3,546
              Net operating loss carryforwards..........   43,849      85,704
              Tax credit carryforwards..................    4,019       3,145
              Other.....................................    3,932         274
                                                          -------    --------
              Total gross deferred tax assets...........   74,161     113,963
              Less valuation allowance..................  (67,119)   (106,594)
                                                          -------    --------
              Net deferred tax assets...................    7,042      7,369
                                                          -------    --------
         Deferred tax liabilities:
              Depreciation/amortization ................      477         438
              Licensing, net............................    5,948       6,931
              Other.....................................      617          --
                                                          -------    --------

              Total gross deferred tax liabilities......    7,042       7,369
                                                          -------    --------

              Net deferred tax asset (liability)........

</TABLE>

                                      F-24




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     During 1999 and 2000, the Company  recorded a valuation  allowance  against
its deferred tax assets as it was not assured that such assets would be realized
in the future.  The  valuation  allowance  at December 31, 2000  includes  $35.4
million which, if realized, will be accounted for as a reduction of goodwill.

     At December 31,  2000,  the Company  expects to have Federal net  operating
loss carryforwards of approximately $175.9 million. These loss carryforward will
expire in years 2007  through  2020.  Of the total  Federal  loss  carryforward,
approximately  $95.6  million  is  subject  to a  Section  382  limitation.  Any
realization of the amount of loss subject to this  limitation  will be accounted
for as a reduction of goodwill.  Additionally, the Company expects to have state
and local net operating loss carryforwards of approximately  $230.3 million. The
state and local loss carryforwards will expire in various jurisdictions in years
2002 through 2020. The state and local loss  carryforwards are generally subject
to the Section 382  limitation.  Benefit was not provided for either the Federal
or state and local net operating loss carryforwards at December 31, 2000.

12.   Quarterly Financial Data

     Summarized quarterly financial information for the years ended December 31,
1999 and 2000 is as follows:
<TABLE>
<CAPTION>


                                                  1999                                          2000
                             ---------------------------------------------   ------------------------------------------
                                                                  Quarter Ended

                               March 31  June 30  September 30   December 31   March 31   June 30  September 30  December 31
                               --------  -------  ------------   -----------   --------   -------  ------------  -----------
                                                        (in thousands, except per share data)
<S>                            <C>       <C>      <C>            <C>           <C>        <C>      <C>
Net sales..................    $75,258   $61,510  $    89,882    $  92,995     $43,187    $51,041  $  73,461$     $ 63,962
Gross profit...............     42,608    30,679       47,531       47,969      20,838     26,713     34,546        21,023
Operating income (loss)....      9,068    (4,044)       3,172       (7,940)     (9,277)    (2,384)      (520)      (46,809)
Net income (loss)..........     (2,927)   (9,070)      (4,644)     (17,150)    (16,646)   (10,587)    (9,196)      (53,429)
Preferred divided
  Requirement..............      3,443     3,525        3,590        3,662       3,735      3,810      3,886         3,964
Basic and dilutive net income
  (loss) per common share.     $ (0.19)  $ (0.38) $     (0.25)   $   (0.62)    $ (0.61)   $ (0.43) $   (0.39)     $  (1.70)

</TABLE>

     The quarterly period ended December 31, 2000,  includes  charges  totalling
$22.9  million  related to the  discontinuance  of certain of the  Company's toy
catagories.

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

      13.   Related Party Transactions

     Mr. Perlmutter  indirectly purchased  approximately $34.9 million of the 8%
Preferred Stock in connection with the Plan.

     Prior to the Company's  acquisition of MEG on October 1, 1998, MEG provided
support to the Company relating to licensing  agreements,  promotion,  legal and
financial  matters.  The cost for these  support  services has been  included in
selling,  general and administrative  expenses, and amounted to $141,000 for the
year ended  December 31, 1997. The Company did not receive any services from MEG
subsequent to the acquisition.

                                      F-25

<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

      An affiliate of the Company, which is wholly-owned by Mr. Perlmutter, acts
as the Company's media  consultant in placing the Company's  advertising and, in
connection therewith, receives certain fees and commissions based on the cost of
the  placement of such  advertising.  During the years ended  December 31, 1998,
1999 and 2000, the Company paid fees and  commissions to the affiliate  totaling
approximately  $1,147,000,  $1,170,000 and $966,000,  respectively,  relating to
such advertisements.

     The Company accrued  royalties to Mr. Arad for toys he invented or designed
of $4,254,000,  $2,981,000  and  $1,551,000  during the years ended December 31,
1998,  1999 and 2000,  respectively.  At December 31, 1999 and 2000, the Company
had an accrual to Mr. Arad of $1,028,000 and $378,000,  respectively, for unpaid
royalties.

     The Company  shares  office  space and certain  general and  administrative
costs with affiliated entities. Rent allocated to affiliates for the years ended
December  31,  1998,   1999  and  2000  was  $105,000,   $106,000  and  $67,000,
respectively.  While  certain costs are not  allocated  among the entities,  the
Company believes that it bears its proportionate share of these costs.

14.      Commitments and Contingencies

     In June 2000,  the Company  entered into a lease  agreement for a corporate
office facility.  The lease term, which is approximately 5 1/2 years,  commences
on or about April 1, 2001 and terminates on July 31, 2006. Annual rental rate is
approximately  $2.8  million for 2001 and 2002,  approximately  $2.9 million for
2003 and 2004 and  approximately  $3.0 million for 2005 and 2006.  In connection
with the lease,  the Company was required to provide the landlord with a Standby
Letter of Credit in the amount of $4.4 million that is  outstanding  at December
31, 2000.

      The  Company  is  a  party  to  various  non-cancelable  operating  leases
involving  office and  warehouse  space  expiring on various dates from June 30,
2000 through April 30, 2010. The leases are subject to escalations based on cost
of living  adjustments and tax allocations.  Minimum future obligations on these
leases are as follows:

<TABLE>
<CAPTION>

                        (in thousands)
      <S>                  <C>
      2001..........       $  2,381
      2002..........          3,311
      2003..........          3,383
      2004..........          3,404
      2005..........          3,406
      Thereafter....          3,545
                     -------  -----
                           $ 19,430
</TABLE>

     Rent  expense  amounted  to  approximately  $1,060,000,   $2,691,000,   and
$2,514,000 for the years ended December 31, 1998, 1999 and 2000, respectively.

     In June 2000, the Company entered into a merchandise licensing agreement to
manufacture  and distribute a line of toys  associated with motion pictures that
are  expected to be released at the end of 2001,  2002 and 2003.  In  connection
with this  licensing  agreement  and future  minimum  royalty  obligations,  the
Company was  required to provide the  licensor  with a $5.0 million cash payment
and a  Standby  Letter  of  Credit  in the  amount  of  $10.0  million  that  is
outstanding at December 31, 2000

                                      F-26


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

     The Company is a party to various royalty agreements with future guaranteed
royalty payments through 2001. Such minimum future obligations are as follows:

<TABLE>
<CAPTION>

                    (in thousands)
     <S>            <C>
     2001.....      $  1,705
     2002.....         5,223
     2003.....         5,000
               --------------
                    $ 11,928
</TABLE>

     The Company has recorded approximately  $14,370,000 as a net receivable for
minimum  guaranteed  royalties as of December 31, 2000.  The portion  receivable
after one year from the  balance  sheet date is included  in other  assets.  The
minimum guaranteed royalties receivable are due as follows:
<TABLE>
<CAPTION>

                                           (in thousands)
     <S>                                      <C>
     2001............................         $9,328
     2002............................          5,485
     2003............................          1,771
     2004 and thereafter.............          2,575
     Allowances and discounting......         (4,789)
                                             ---------
                                             $14,370
</TABLE>

Legal Matters

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

     Spider-Man   Litigation.   The  Company's   subsidiaries   MEG  and  Marvel
Characters,  Inc.,  (collectively,  the "Marvel Parties") have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion  picture  based on the  Spider-Man  character  which was settled in March
2001.

                                      F-27
<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

         Wolfman v. New Line Cinema Corp.  et al. On August 20, 1998,  Marvin A.
Wolfman  commenced an action in the United States District Court for the Central
District  of  California  against  New  Line  Cinema  Corporation,  Time  Warner
Companies,  Inc.,  the  Company,  MEG and its wholly  owned  subsidiary,  Marvel
Characters,  Inc.,  and others.  The complaint  alleges that the motion  picture
Blade,  produced and  distributed by New Line pursuant to an agreement with MEG,
as well as the Company's sale of related action figure toys, infringes Wolfman's
claimed  copyrights  and  trademarks  as  the  author  of the  original  stories
featuring the Blade and Deacon Frost characters  (collectively,  the "Work") and
that Wolfman created the Work as an independent  contractor  engaged by MEG. The
relief  sought by complaint  includes a  declaration  that the  defendants  have
infringed Wolfman's copyrights, compensatory and punitive damages, an injunction
and various  other forms of equitable  relief.  The Company  believes  that each
component  of the Work was  created  for MEG as a "work  for  hire"  within  the
meaning of the applicable  copyright  statute and believes that all of Wolfman's
claims are  without  merit and  intends to defend the action  vigorously  if the
action is allowed to proceed.

         On  February  24,  1999,   Wolfman  and  the  Company  entered  into  a
stipulation  pursuant to which the United States District Court for the District
of Delaware will  determine the issue of whether  Wolfman or Marvel  Characters,
Inc.  (which is now a wholly  owned  subsidiary  of the Company) is the rightful
owner of Blade and Deacon Frost and a number of other characters. In the context
of this proceeding, the Company has sought a declaration that Marvel Characters,
Inc., not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial
on the merits was held in December 1999 and on November 6, 2000 the judge issued
an  opinion  and order  finding in favor of the  Company  and  holding  that the
Company is the lawful owner of the rights  claimed by Wolfman.  As of this date,
Wolfman filed on appeal which has not been scheduled.

         Marvel v. Simon.  In December  1999,  Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective  December 7, 2001  alleged  transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000,  the Company  commenced an action  against  Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the  Captain  America  character  was created by Simon and others as a "work for
hire" within the meaning of the applicable  copyright statute and that Simon had
acknowledged  this fact in  connection  with the  settlement  of previous  suits
against the Company's  predecessors  in 1969. The suit seeks a declaration  that
Marvel  Characters,  Inc.,  not Mr. Simon,  is the rightful owner of the Captain
America character.

         Administration  Expense  Claims  Litigation.  The Company has initiated
litigation  contesting  the  amount of  certain  Administration  Expense  Claims
submitted to the Company for payment.  While the amounts claimed are material to
the  Company's  financial  position,  the  Company  believes  that the  ultimate
resolution  of these  matters  will not be material to the  Company's  financial
condition,  results  of  operations  or cash  flows,  although  there  can be no
assurances.

                                      F-28




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

15.   Benefits Plans

     The Company has a 401(k) Plan for its employees. In addition, in connection
with the sale of Fleer (see Note 3), the Company  retained  certain  liabilities
related  to  a  noncontributory   defined  benefit  pension  plan  for  salaried
employees.  In prior years,  this plan was amended to prohibit  participation by
new  participants.  The accumulated  benefit  obligation is approximately  $17.0
million.  The funded value of plan assets is approximately $17.5 million and the
pension  liability  at December 31, 2000 is  approximately  $2.0  million.  Plan
expenses  for the  years  ended  December  31,  1998,  1999  and  2000  were not
significant.

16.   Segment Information

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

Toy Merchandising and Distributing Segment

     The toy merchandising and distributing segment designs,  develops,  markets
and distributes  both  innovative and traditional  toys in the United States and
internationally.  The Company's toy products  fall into three  categories:  toys
based on its characters, proprietary toys designed and developed by the Company,
and toys based on properties licensed to the Company by third parties.  Prior to
October 1, 1998, the Company  operated  solely within the toy and  merchandising
and distributing segment.

Publishing Segment

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

                                      F-29




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

Licensing Segment

     The  licensing  segment  relates  to the  licensing  of or  joint  ventures
involving the Marvel  Characters for use with (i) merchandise,  (ii) promotions,
(iii) publishing, (iv) television and film, (v) on-line and interactive software
and (vi) restaurants, theme parks and site-based entertainment.

<TABLE>
<CAPTION>

                                                  Toys        Publishing   Licensing     Corporate       Total
                                                 -------      ----------   ---------     ---------    ----------
                                                                         (in thousands)
<S>                                              <C>          <C>          <C>           <C>          <C>
Year  ended December 31, 1998

Net sales....................................... $ 212,436      $ 14,707   $ 4,933          --        $ 232,076
Gross profit....................................    92,743         6,820     4,535          --          104,098
Operating loss (income).........................   (18,742)          258      (976)         --          (19,460)
EBITDA(1).......................................     1,259         1,409     4,295          --            6,963

Total capital expenditures .                        17,325            --       --           --           17,325

Identifiable assets for continuing operations...  $149,842      $101,697  $401,098       $11,267       $663,904
Net assets held for disposition.................       --         26,000       --           --           26,000


Total identifiable assets.......................  $149,842      $127,697  $401,098       $11,267       $689,904




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

Year  ended December 31, 1999

Net sales.......................................   $245,775      $43,007   $30,863           --        $319,645
Gross profit....................................    119,788       18,725    30,274           --         168,787
Operating income (loss).........................     10,932        3,707      (100)      (14,283)           256
EBITDA(1).......................................     30,282        8,341    19,851       (14,283)        44,191

Total capital expenditures......................     20,977           --        --           --          20,977

Identifiable assets for continuing operations...   $184,973      $86,263  $383,401       $    -        $654,637
Total identifiable assets.......................   $184,973      $86,263  $383,401       $    -        $654,637



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

Year  ended December 31, 2000

Net sales.......................................     $167,309    $45,183      $19,159        --        $231,651
Gross profit....................................       61,651     22,857       18,612        --         103,120
Operating (loss)income .........................      (45,296)     9,099      (15,222)   (7,571)        (58,990)
EBITDA(1).......................................      (13,762)    12,282        4,724    (7,571)         (4,327)

Total capital expenditures......................       15,069         41            5        --          15,115

Identifiable assets for continuing operations...     $111,266    $76,808     $367,210    $    -        $555,284
Total identifiable assets.......................     $111,266    $76,808     $367,210    $    -        $555,284

</TABLE>

(1) "EBITDA"  is  defined  as  earnings  before  extraordinary  items,  interest
    expense, taxes, depreciation and amortization. EBITDA does not represent net
    income or cash flow from  operations as those terms are defined by generally
    accepted  accounting  principles and does not necessarily  indicate  whether
    cash flows will be sufficient to fund cash needs.

                                      F-30



<PAGE>

                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

17.  Supplemental Financial Information

     The following represents the supplemental consolidating condensed financial
statements of Marvel Enterprises, Inc., which is the issuer of the Senior Notes,
and its subsidiaries that guarantee the Notes and the non-guarantor subsidiaries
as of December 31, 1999 and 2000 and for each of the three years ended  December
31, 2000 .

<TABLE>
<CAPTION>

                                                 Issuer
                                                  And          Non-
                                               Guarantors    Guarantors    Total
                                               ----------    ----------   ----------
                                                         (in thousands)
<S>                                            <C>           <C>          <C>
For The Year Ended December 31, 1998

Net sales...................................    $ 196,106    $35,970      $ 232,076
Gross profit................................       91,281     12,817        104,098
Operating (loss) income.....................      (21,106)     1,646        (19,460)
Net (loss) income...........................      (33,806)     1,196        (32,610)

For The Year Ended December 31, 1999

Net sales...................................    $  280,355   $39,290      $ 319,645
Gross profit................................       154,759    14,028        168,787
Operating (loss) income.....................       (4,925)     5,181            256
Net (loss) income...........................      (37,994)     4,203        (33,791)

For The Year Ended December 31, 2000

Net sales...................................    $  181,554   $50,097      $ 231,651
Gross profit................................        85,213    17,907        103,120
Operating (loss) income.....................      (66,463)     7,473        (58,990)
Net (loss) income...........................      (96,154)     6,296        (89,858)

</TABLE>
<TABLE>
<CAPTION>


                                                 Issuer
                                                   And         Non-      Inter-
                                                Guarantors   Guarantors company     Total
                                                ----------   ---------- --------   --------
<S>                                             <C>          <C>        <C>        <C>
December 31, 1999

Current assets .............................    $  165,580   $ 7,329    $   --     $ 172,909
Non-current assets..........................       481,302    32,427    (32,001)     481,728
                                                   -------    ------    --------   ---------
Total assets................................    $  646,882   $39,756    $(32,001)  $ 654,637
                                                ==========   =======    ========   =========
Current liabilities.........................       103,877     9,114    (32,001)      80,990
Non-current liabilities.....................       251,094        --         --      251,094
8% Preferred Stock..........................       186,790        --         --      186,790
Stockholders' equity........................       105,121    30,642         --      135,763
                                                ----------   --------------------  ---------

                                                $  646,882   $39,756    $(32,001)  $ 654,637
                                                ==========   =======    ========   =========

December 31, 2000

Current assets..............................    $  109,870    $3,573    $  --      $ 113,443
Non-current assets..........................       440,831    40,347     (39,337)    441,841
                                                ----------   -------     --------  ---------
Total assets................................    $  550,701   $43,920    $(39,337)  $ 555,284
                                                ===========  ========   =========  =========
Current liabilities.........................       104,560     6,480     (39,337)     71,703
Non-current liabilities.....................       250,000        --           0     250,000
8% Preferred Stock..........................       202,185        --           0     202,185
Stockholders' equity........................       (6,044)    37,440           0      31,396
                                                ----------   --------   ---------  ---------
                                                $  550,701   $43,920    $(39,337)  $ 555,284
                                                ==========   ========   =========  =========
</TABLE>


                                      F-31


<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000



<TABLE>
<CAPTION>

                                                                Issuer
                                                                 and          Non-
                                                             Guarantors    Guarantors    Total
                                                             ----------    ----------   --------
                                                                       (in thousands)
<S>                                                          <C>           <C>          <C>
Year Ended December 31, 1998
Cash flows from operating activities:
Net (loss) income..........................................  $ (33,806)    $1,196        $(32,610)
                                                             =========     ======        ========
     Net cash provided by operating activities.............     40,959      1,025          41,984
     Net cash used in investing activities.................   (285,164)      (225)       (285,389)
     Net cash provided by financing activities.............    279,500                    279,500
                                                             ---------     -------       ---------
Net increase in cash.......................................     35,295        800          36,095
Cash, at beginning of year.................................      6,962        634           7,596
                                                             ---------     -------       ---------
Cash, at end of year.......................................  $  42,257     $1,434        $ 43,691
                                                             =========     ======        ========

Year Ended December 31, 1999
Cash flows from operating activities:
Net (loss) income..........................................  $   (37,994)  $4,203        $(33,791)
                                                             ===========   ======        ========
     Net cash provided by operating activities.............           57      758             815
     Net cash used in investing activities.................      (18,981)     (29)        (19,010)
     Net cash provided by financing activities.............       39,318       --          39,318
                                                             ------------  -------       ---------
Net increase in cash.......................................       20,394      729          21,123
Cash, at beginning of year.................................       42,257    1,434          43,691
                                                             ------------  --------      ---------
Cash, at end of year.......................................  $    62,651   $2,163        $ 64,814
                                                             ===========   ======        ========

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

</TABLE>


                                      F-32



<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2000

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                                     Allowances
                                        Balance      Acquired in    Charged to Sales   Charged to               Balance
                                      At Beginning       MEG          or Costs and       Other                   at End
                                       of Period      Acquisition        Expenses      Accounts    Deductions   of Period
            Description
----------------------------------    -----------    -------------  ----------------   ---------   -----------  ---------
                                                                   (in thousands)
<S>                                   <C>            <C>            <C>                <C>         <C>          <C>
Year Ended December 31, 1998

Allowances included in Accounts
   Receivable. Net:

Doubtful accounts--current............     430         3,112              409(2)          --            343      3,608
Doubtful accounts--non-current........      --           521              --              --                       521
Advertising, markdowns, returns,
   Volume discounts and other........   29,387         6,255           33,998(1)          --         48,325     21,315

Year Ended December 31, 1999

Allowances included in Accounts
   Receivable. Net:

Doubtful accounts--current............   3,608           --             1,141(3)          --            798       3,951
Doubtful accounts--non-current........     521           --               580(2)          --            121         980
Advertising, markdowns, returns,
   Volume discounts, and other.......   21,315          (380)          47,728(1)          --         44,102      24,561

Year Ended December 31, 2000

Allowances included in Accounts
   Receivable. Net:

Doubtful accounts--current............   3,951           --              899 (4)          --           308       4,542
Doubtful accounts--non-current........     980           --             (980)(2)          --            --          --
Advertising, markdowns, returns,
   Volume discounts and other........   24,561           --            32,779(1)          --        37,947      19,393

</TABLE>

(1)  Charged to sales
(2)  Charged to costs and expenses.
(3)  1,228 charged to costs and expenses and (87) charged to sales.
(4)  962 charged to costs and expenses and (63) charged to sales



                                      F-33