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, 2001

                                       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)

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

                                 (212) 576-4000

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

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

                     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 22, 2002 was
$142,779,467  based on a price of $8.35 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 22,  2002,  there  were
34,866,054 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................................................ 8
ITEM 3.         LEGAL PROCEEDINGS......................................... 9
ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 9

PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                        STOCKHOLDER MATTERS.............................. 10
ITEM 6.         SELECTED FINANCIAL DATA.................................. 10
ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                        CONDITION AND RESULTS OF OPERATIONS...............11
ITEM 7 A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES
                        ABOUT MARKET RISK................................ 20
ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............21
ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                        ACCOUNTING AND FINANCIAL DISCLOSURE.............. 21

PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 21
ITEM 11.        EXECUTIVE COMPENSATION................................... 24
ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                        AND MANAGEMENT....................................31
ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............33

PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                        ON FORM 8-K.......................................36

SIGNATURES............................................................... 40

</TABLE>

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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:

o    Potential inability to successfully implement business strategy.

o    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  or the timing of releases and
     the  decisions to proceed with feature  films and  television  series based
     upon Marvel characters are delayed or cancelled,  the ability to obtain new
     licenses  for motion  pictures or  televisions  shows may be  substantially
     diminished.

o    The continued financial stability of major licensees of the Company

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

o    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 imposition of 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.

o    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.

o    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  56% of our total toy sales in 2001.  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,

                                        ii

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     however,  we face  the  risk  that we may be  unable  to  provide  adequate
     supplies of popular  toys to retailers  in a timely  fashion,  particularly
     during the Christmas season, and may consequently lose sales.

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

o    A  decrease  in  cash  flow  effecting  the  Company's  ability  to pay the
     outstanding indebtedness.

o    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.

                                       iii


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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  (the "Plan") 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
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.

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Marvel Licensing

     Marvel  Licensing  licenses  the  Company's  characters  for  use in a wide
variety of consumer products, including toy merchandise and non-toy merchandise.
Marvel  Licensing  also  receives fees from the sale of licenses to a variety of
media,   including   television  programs,   feature  films,   destination-based
entertainment, and on-line media.

     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 (now ABC Family  Channel) since 1994,  and X-Men,  which has
also aired 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  Licensing  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 and foreign  television  stations.  In 2001,  the
live action show entitled Mutant X began airing on syndicated television. Mutant
X are new Marvel characters unrelated to X-Men.

     Feature Films

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

     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.  Expansion has just been
announced with a Spider-Man  attraction at the Universal  Park in Osaka,  Japan.


      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 2002.

Toy Merchandise

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

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

     Non-Toy Merchandise

     Marvel  licenses  the  Company's  characters  for use in a wide  variety of
consumer   products,   including  apparel,   interactive   games,   electronics,
stationery, back-to-school, seasonal gifts and novelties, footwear, collectibles
and advertising.

Marvel Publishing

        Since 1995, the comic publishing  business has declined,  along with the
number of  retailers  that carry comic  books.  The last six months of 2001 have
seen a reversal of that trend.

       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 part of their magazine  merchandise  programs have dropped the product
due to an overall reduction in comic book 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.  Continuing the initiative
that began in 2000,  the Company  strives to improve our  editorial  process and
comic book content. Management believes these initiatives have contributed to an
increase of market share for 2001.

     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 2001,  Marvel cut back on the number of  expensive,  exclusive
agreements with writers and artists while  establishing new  relationships  with
some of the industry's hottest creators,  as well as recruiting from outside the
industry.

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     The  creative  process is a team  effort led by a Marvel  editor.  A writer
develops the 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 2001,  Marvel  eliminated the costly and  inefficient  process of
hand-coloring  books  in favor  of  higher  quality,  less  expensive,  computer
coloring.  These  freelance  creators and the  printer/binders  for Marvel comic
books are unaffiliated third parties

     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  non-returnable  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 2001,  Marvel launched the Max Imprint.  Geared towards readers over the
age of 18 with more mature tastes,  these books  immediately  rose to the top of
the Mature Readers Category and received critical acclaim.

     For the years ended December 31, 1999,  2000 and 2001,  approximately  80%,
77%, and 80%, 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 2001, Marvel continued its historical policy of printing to order for the
direct  market,  thus  eliminated  the cost of  printing  and  marketing  excess
inventory.  The  revived  collector  interest in Marvel has  increased  consumer
traffic in the direct market.  The revived interest has been instrumental in not
only  stimulating  market  growth but also  increasing  sales in Marvel's  trade
paperback  collections.  Trade paperbacks are compilations of previously printed
material collected to tell a "complete" story. As monthly periodicals  continued
to  sell  out in  2001,  Marvel  experienced  an  increase  in  demand  for  the
compilations permitting the Company to achieve a leadership role in the category
of trade.

     For the years ended December 31, 1999, 2000 and 2001,  approximately 9%, 8%
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.  In 2001,  distribution to national
bookstore chains was consolidated with direct market distribution resulting in a
significant cost savings.

     For the years ended December 31, 1999, 2000 and 2001,  approximately 2%, 2%
and 3%,  respectively,  of Marvel  Publishing's  net  publishing  revenues  were
derived from subscription sales.

     For the years ended December 31, 1999, 2000 and 2001, approximately 9%, 13%
and 9%,  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.

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Toy Biz

     Toy Biz designs,  develops,  markets and distributes a limited line of toys
to the  worldwide  marketplace.  The Company's  primary  products are based upon
Spider-Man: The Movie and the movie trilogy Lord of the Rings. Toy Biz also does
the design,  development,  marketing and sales services for TBW for which it was
reimbursed  by TBW for its direct  costs.  The Spectra Star  division of Toy Biz
designs,  produces and sells kites in both the mass market  stores and specialty
hobby shops.

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

     Due to an  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,  the  elimination  of certain high risk product
categories and lines, shifting the emphasis of its business to direct import and
the licensing agreement with TBW.

     Products

     While Toy Biz has historically  marketed a variety of toy products designed
for children of different age groups,  its current product  strategy is to focus
sales  primarily on toys based on the  characters in  Spider-Man:  The Movie and
Lord of the Rings,  and continue with the Spectra Star kite  business.  In 2001,
approximately  75% of the Company's net toy sales were  generated  from products
not based on the Marvel characters.

      Boys' Products. Toy Biz's products are primarily aimed for boys ages 4-12.
In 2001, Toy Biz developed a line of action  figures,  accessories and role play
items based upon the Lord of the Rings movie trilogy produced by New Line Cinema
(a division of AOL/Time Warner). The first picture was released in December 2001
with the second film  scheduled  for release  during  Holiday 2002 and the third
film released  during  Holiday  2003.  In addition,  Toy Biz developed a line of
action  figures,  accessories and role play items based on the characters in the
upcoming Spider-Man: The Movie which is scheduled to be released in May 2002.

     Design and Development

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

     Toy Biz relies on independent parties in China to manufacture 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. 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.

     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.

                                       5
<PAGE>


     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  85%, 72% and 77% of the Company's net toy sales in 1999, 2000 and
2001, 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  70%, 60% and 56% of the Company's  total toy sales in 1999,  2000
and 2001, 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 and are 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 Latin America,  Asia including many Pacific Rim countries,
Middle  East and  Africa.  While the Company  has  registered  its  intellectual
property in these  countries,  and expects  that its rights will be protected in
these countries,  certain other countries do not have intellectual property laws
that protect United States holders of intellectual  property and there can be no
assurance  that the  Company's  rights will not be  violated  or its  characters
"pirated" in these countries.

Advertising

     Although a portion of the Company's advertising budget for its toy products
is expended for newspaper advertising,  magazine advertising, catalogs and other
promotional  materials,  the Company  allocates  a majority  of its  advertising
budget for its toy products to television  promotion.  The Company advertises on
national television and purchases advertising spots on a local basis. Management
believes that  television  programs  underlying  the Company's toy product lines
increases  exposure and awareness.  However,  since dolls and games, two product
lines that required a substantial advertising commitment,  were eliminated,  the
Company  has  decided to reserve its  advertising  dollars for its core  product
lines, action figures and accessories, which produce higher profit margins.

     The Company currently engages Tangible Media, Inc.  ("Tangible  Media"), an
affiliate  of Isaac  Perlmutter,  to purchase  certain of its  advertising.  Mr.
Perlmutter is an employee,  director and the Company's  largest  stockholder  as
well as  Vice-Chairman  of the  Board of  Directors.  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  AOL  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 Toy
Max  International 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, 2001,  the Company  employed  approximately  500 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.  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,  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.

                                       7
<PAGE>


 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").  During  1999,  2000  and  2001,  the  Company  paid
approximately  $10.4 million,  $2.1 million and $0.5 million,  respectively,  of
additional  Administration  Expense Claims. The Company estimates that it may be
required to pay no more than $3.5 million of additional  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.

     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.

     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            64,300          Leased
Office/Showroom     New York, New York            14,100          Leased
Office/Warehouse    Yuma, Arizona                 80,000          Owned
Warehouse           Fife, Washington             125,000          Leased
Manufacturing       San Luis, Mexico             190,000          Owned
Office              Santa Monica, California       4,900          Leased

</TABLE>

                                       8

<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

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

     Marvel v.  Simon.  In  December  1999,  Joseph H.  Simon  filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective  December 7, 2001  alleged  transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000,  the Company  commenced an action  against  Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the  Captain  America  character  was created by Simon and others as a "work for
hire" within the meaning of the applicable  copyright statute and that Simon had
acknowledged  this fact in  connection  with the  settlement  of previous  suits
against the Company's  predecessors  in 1969. The suit seeks a declaration  that
Marvel  Characters,  Inc.,  not Mr. Simon,  is the rightful owner of the Captain
America  character.  In February 2002,  the Court granted the Company's  motion
for summary judgment.  Simon has filed a Notice of Appeal but no date for the
appeal has been scheduled.

     X-Men  Litigation.  In April 2001,  Twentieth  Century Fox Film Corporation
sued Marvel,  Tribune  Entertainment  Co.,  Fireworks  Communications,  Inc. and
Fireworks  Television  (US), Inc. in the United States District Court,  Southern
District of New York,  seeking an injunction  and damages for alleged  breach of
the 1993 X-Men movie license,  unfair  competition,  copyright  infringement and
tortuous  interference  with the  contract  arising from the Mutant X television
show being produced by Tribune and Fireworks under license from Marvel which was
released  in the fall of 2001.  On the same day Fox  filed the  foregoing  suit,
Marvel  commenced an action  against Fox in the same court seeking a declaratory
judgment  that the license of the Mutant X title and certain  Marvel  characters
did not  breach  the  1993  X-Men  movie  license  with  Fox.  Both  suits  were
consolidated.  On August 9, 2001,  in response to Fox's motion for a preliminary
injunction and defendants' motion to dismiss Fox's claims, the Court (i) granted
the motion to dismiss all of Fox's claims  except for its breach of contract and
copyright claims (ii) granted Fox's motion for a preliminary injunction but only
as to the  defendants  use of (a) video clips from the X-Men film and/or trailer
in order to promote the new Mutant X series and (b) a logo that is substantially
similar  to the  logo  used  by Fox in  connection  with  the  X-Men  film.  The
preliminary  injunction  will not have a  significant  effect  on the  Company's
operations.  In January  2002,  the United  States  Appeals Court for the Second
Circuit,  in response to Fox's appeal,  affirmed the District  Court's denial of
Fox's motion for a preliminary  injunction to prevent the airing of the Mutant X
series and  remanded  the case to the  District  Court for  further  proceedings
consistent  with its opinion.  At the present  time,  the parties are engaged in
pre-trial discovery with a trial on the merits scheduled for November 2002.

     MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in the amount of $3.0 million on a
breach of contract  action  based on a 1994 toy license  between Toy Biz and The
Coleman  Company.  The  complaint  alleged  that  Toy Biz did  not  fulfill  its
obligation to spend certain monies on the advertising and promotion of Coleman's
products.  The Company filed and intends to vigorously  prosecute an appeal. The
Company has provided for this judgment during the second quarter of 2001 in the
Consolidated Statement of Operations.

         Administration  Expense  Claims  Litigation.  The Company has initiated
litigation  contesting  the  amount of  certain  Administration  Expense  Claims
submitted to the Company for payment.  As of December 31, 2001,  the Company has
settled substantially all Administrative Expense Claims and believes the accrual
of $3.5 million is sufficient to provide for its remaining obligations.

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 2001.


                                       9

<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 2000                 High             Low
         ----------------                 ------           ------
         <S>                              <C>              <C>

         First Quarter                    $ 6.50           $ 5.31
         Second Quarter                   $ 6.94           $ 4.19
         Third Quarter                    $ 7.38           $ 3.12
         Fourth Quarter                   $ 3.19           $ 1.44

         Fiscal Year 2001

         First Quarter                    $ 2.88           $ 1.44
         Second Quarter                   $ 3.58           $ 1.79
         Third Quarter                    $ 4.03           $ 1.90
         Fourth Quarter                   $ 4.15           $ 2.24
</TABLE>

     As of March 21, 2002,  there were 18,491 holders of record of the Company's
Common Stock.

     The Company has not declared any  dividends on the Common  Stock.  The HSBC
Credit 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, 2001.  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,
                             1997        1998        1999       2000       2001
                           ---------  ---------  ---------  ---------  ---------
                                   (in thousands, except per share amounts)

Statement of Operations
      Data:
<S>                        <C>        <C>         <C>       <C>        <C>

Net sales................. $ 150,812  $232,076   $319,645   $231,651   $181,224
Operating (loss) income...   (49,288)  (19,460)       256    (58,990)     1,618
Net (loss) income.........   (29,465)  (32,610)   (33,791)   (89,858)     5,265
Basic and diluted net loss
  per common share........     (1.06)    (1.23)     (1.43)     (3.13)     (0.31)
Preferred dividend
  requirement.............        71     3,380     14,220     15,395     16,034

At December 31:
Balance Sheet Data:
Working capital (deficit)..   74,047  (133,392)    91,919     43,067     28,926
Total assets...............  150,906   689,904    654,637    553,957    517,570
Borrowings.................   12,000   200,000       --         --       37,000
Other non-current debt.....     --      27,000    250,000    250,000    150,962
Redeemable preferred stock.     --     172,380    186,790    202,185    207,975
Stockholders' equity.......  107,981   183,624    135,763     31,396     41,958

</TABLE>
                                       10

<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, 2001.
Because of the significant effect of the Reorganization on the Company's results
of   operations,   the   Company's   historical   results  of   operations   and
period-to-period comparisons will not be indicative of future results.

Overview

     Net Sales

     The  Company's  net sales  are  generated  from (i)  licensing  the  Marvel
characters for use on merchandise,  toys, promotions,  feature films, television
programs,  theme parks and various other areas;  (ii) publishing comic books and
trade paperbacks,  including related advertising  revenues;  and (iii) marketing
and distributing toys primarily based upon characters from Spider-Man: The Movie
and  characters  from the movie  trilogy based upon Lord of the Rings as well as
kites through its Spectra Star  division.  Licensing,  publishing  and toys have
accounted for 22%, 27% and 51%, respectively, of the Company's net sales for the
year ended December 31, 2001.

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

    During  2001,  the  Company  entered  into a 66  month  exclusive  licensing
agreement  with an unrelated Hong Kong company,  Toy Biz Worldwide,  Ltd ("TBW")
for the sale and manufacture of toy action figures and accessories  that feature
Marvel characters other than those based upon the upcoming Spider-Man movie. TBW
is  using  the Toy Biz  name for  marketing  purposes  but  Marvel  has  neither
ownership  interest in TBW nor any other  financial  obligations  or  guarantees
related to TBW. The agreement  represents a strategic decision by the Company to
eliminate much of the risk and investment previously associated with these lines
of toys while enabling  Marvel to participate in their success  through  ongoing
licensing fees. Toy Biz does product design,  marketing and sales for TBW and is
reimbursed for these expenses.

     Beginning in 2001, Toy Biz marketed and  distributed  toys  associated with
the Lord of the Rings toy license which  coincided with the release of the first
of the films in the trilogy in December of 2001. This product line will continue
in 2002 and 2003 and will  coincide  with the  release of the other two films in
the trilogy during the Holiday 2002 and 2003 seasons. In addition, Toy Biz began
marketing and distributing toys associated with the Spider-Man:  The Movie which
is expected to be released in May 2002.  Spectra Star continues to sell kites to
both the mass market stores and specialty hobby shops.

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

   Operating Expenses: Cost of Sales

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

                                       11
<PAGE>

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

     In 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
payroll, 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 New  Line  Cinema,  World  Championship  Wrestling,  Universal
Studios,  Sony Pictures,  as well as toys developed by outside inventors.  There
are no royalty payments for Marvel character based toy products except for those
characters  related to  Spider-Man:  The Movie in which the  Company  will pay a
royalty to Sony  Pictures as part of their joint venture  arrangement.  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's  warehousing and store  merchandising costs have declined 71%
during  2001 as  compared  to 2000 due to the  elimination  of  certain  product
categories and lines as well as effective cost control.

   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 related to the goodwill created
pursuant  to the  combination  of Toy Biz,  Inc.  and MEG is  amortized  over an
assumed 20-year life. However, due to the adoption of FASB 142, the Company will
undergo a goodwill  impairment  test  during  the first six  months of 2002.  If
goodwill is deemed to have been impaired, the Company will then take a charge in
its Statement of Operations during the first six months of 2002, as a cumulative
effect of a change in accounting principle reflected in the quarter ending March
31, 2002.  If no  impairment  exists,  then the asset balance will remain at its
current level.  Effective  January 1, 2002, the Company will adopt SFAS No. 142,
"Goodwill and Other Intangible Assets",  and accordingly will no longer amortize
goodwill but will be subject to annual  impairment  tests in accordance with the
statement. Amortization expense for the year ended December 31, 2001 relating to
goodwill was $23.5 million

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

                                       12
<PAGE>

Results of Operations of the Company

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

     The Company's net revenue decreased  approximately  $50.4 million to $181.2
million for the year ended  December  31,  2001 from $231.6  million in the 2000
period. Toy Biz revenues were down $75.6 million or 45% primarily as a result of
the  licensing  of Marvel  character  based toys to TBW,  an  unrelated  entity,
effective  July 1, 2001. The decrease in Toy Biz revenues was also the result of
declining sales relating to X-Men motion picture toys,  dolls,  WCW products and
Pokemon  marbles which were sold through  close-out sales in order to dispose of
this inventory  according to the Company's plan of restructuring for the Toy Biz
division.  Licensing  revenue  increased by approximately  $20.9 million in 2001
from 2000 as a result of a  substantial  number of licensing  agreements  signed
across  a  wide  array  of  consumer  products  such  as  apparel,  electronics,
interactive games,  stationery and back to school, seasonal gifts and novelties,
footwear,  and collectibles.  Additional licensing revenues were also recognized
from first and second  seasons of our  television  series " X-Men  Evolution" as
well as from our licensing agreement with TBW effective July 1, 2001.  Licensees
include such names as Buster Brown, Haddad, Encore Software,  Universal,  Burger
King and The Dairy Board.  Publishing  revenues  increased by approximately $4.3
million  primarily due to increased sales of comic books and trade paperbacks to
the direct market.

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

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

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

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

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

                                       13

<PAGE>


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

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

    During 2001, the Company,  through a series of  transactions,  reacquired an
aggregate  $99.0  million  principal  amount of its Senior Notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The principal
amount  includes  $39.2  million  with a fair value of $20  million  received in
satisfaction  of licensing  fees from a third party.  The principal  amount also
includes  $48.5 million  purchased from Mr.  Perlmutter  for $26.8 million.  The
Company  recorded an extraordinary  gain of $32.7 million,  net of write-offs of
deferred financing fees of $3.2 million and income taxes of $11.3 million

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

     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 write
down of certain  inventories  added to a higher  cost of sales  component  and a
lower gross margin in 2000.

     Selling,  general and administrative expenses 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.

     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.

                                       14

<PAGE>


     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 1999. 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.

Liquidity and Capital Resources

     The Company's primary sources of liquidity are cash on hand, cash flow from
operations  and cash  available  from the $20.0  million  HSBC  letter of credit
facility.  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 1999,
2000 and 2001 was $0.8 million, ($24.2) million and $8.8 million, respectively.

     At December 31, 2001, the Company had working capital of $28.9 million.

     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 of  Directors,  in cash,  in
additional  shares of 8%  Preferred  Stock or in any  combination  thereof.  The
Company is restricted  under the  Indenture  and under the HSBC 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.

     The Company  estimates  that it may be required to pay  approximately  $3.5
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, 2001 is approximately $5.2 million.

      On February 25, 1999, the Company  completed a $250.0 million  offering of
senior  notes  in  a  private  placement  exempt  from  registration  under  the
Securities  Act of 1933 ("the  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.  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 senior notes (the "Senior Notes").
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.

                                       15

<PAGE>


      In  February  1999,  the  Company  recorded  an  extraordinary  charge  of
approximately  $1.5  million,  net of tax benefit for the  write-off of deferred
financing costs in connection  with the repayment of certain  interim  financing
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 Company did not borrow under the Citibank Credit Facility.

      On October 5, 2001, the Company  terminated the Citibank  Credit  Facility
and replaced $12.4 million of letters of credit  outstanding  under the facility
with letters of credit guaranteed by Object Trading Corp. (" Object Trading"), a
corporation  wholly owned by Isaac  Perlmutter,  a director,  employee and major
shareholder of the Company as well as  Vice-Chairman  of the Board of Directors.
The $3.4 million  letter of credit issued in  connection  with the appeal in the
MacAndrews  &  Forbes  litigation  (See  Item 3 - Legal  Proceedings)  was  also
guaranteed  by Object  Trading.  The Company  granted to Object  Trading a first
security  interest in the same assets  that were  granted as security  under the
Citibank Agreement.

      On November 30, 2001, the Company and HSBC Bank USA ("HSBC")  entered into
an agreement for an $80 million senior credit facility ("Credit Facility") . The
Credit  Facility  is  comprised  of a $20  million  revolving  letter  of credit
facility  renewable  annually  for up to three years and a $60 million  multiple
draw three year amortizing term loan facility  available until January 31, 2002.
Prior to January 31 ,2002,  the Company drew down $37 million  which was used to
finance the  repurchase a portion of the Company's  Senior Notes.  The term loan
facility amortizes quarterly over three years with the outstanding principal due
and payable on December 31, 2004.  At the option of the Company,  the term loans
bears  interest  either at the  lender's  base rate plus a margin of 2.5% or the
lender's  reserve  adjusted  LIBOR rate plus a margin of 3.5%.  The  Company may
prepay the term loans  applying the base rate at any time without  penalty,  but
may  only  prepay  the  LIBOR  rate  loans  without  penalty  at the  end of the
applicable interest period. The letter of credit facility is a one-year facility
subject to annual renewal,  expiring on the date which is five days prior to the
final  maturity  for the term loan  facility.  The $15.8  million  of letters of
credit previously  issued by Object Trading.  were replaced by letters of credit
issued by HSBC. The Credit  Facility  contains  customary  mandatory  prepayment
provisions for  facilities of this nature,  including an excess cash flow sweep.
It also contains customary event of default provisions and covenants restricting
the  Company's  operations  and  activities,  including  the  amount of  capital
expenditures, and also contains certain covenants relating to the maintenance of
minimum net worth and a minimum interest coverage and leverage ratio. The Credit
Facility is secured by a) a first  priority  perfected lien in all of the assets
of the Company;  b) a first priority  perfected lien in all of the capital stock
of each of the Company's  domestic  subsidiaries;  c) a first priority perfected
lien in 65% of the capital stock of each of the Company's foreign  subsidiaries;
and d) cash collateral to be placed in a cash reserve account in an amount equal
to at least $10 million at the end of each fiscal quarter.

     In consideration  for the Credit Facility,  the Company issued a warrant to
HSBC to purchase  up to 750,000  shares of the  Company's  common  stock.  These
warrants have an exercise price of $3.62,  a life of five years.  The fair value
for the warrants was  estimated  at the date of issuance  using a  Black-Scholes
pricing model with the following assumptions:  risk free interest rate of 4.16%;
no dividend  yield;  expected  volatility  of 0.924;  and expected  life of five
years. The aggregate value of $1,980,000 included in deferred financing costs on
the  Consolidated  Balance  Sheets and is being  amortized  over the term of the
Credit Facility using the effective interest method.

     In connection with the Credit  Facility,  the Company and Isaac  Perlmutter
entered into a Guaranty and Security Agreement. Under the terms of the Guaranty,
Mr. Perlmutter has guaranteed the payment of the Company's obligations under the
Credit Facility in an amount equal to 25% of all principal  obligations relating
to the Credit Facility plus an amount,  not to exceed $10 million,  equal to the
difference  between  the  amount  required  to be in the  cash  reserve  account
maintained  by the Company and the actual amount on deposit in such cash reserve
account at the end of each fiscal  quarter;  provided that the aggregate  amount
guaranteed by Mr. Perlmutter will not exceed $30 million. Under the terms of the
Security  Agreement,  Mr. Perlmutter has provided the creditors under the Credit
Facility with a security  interest in the following  types of property,  whether
currently  owned  or  subsequently   acquired  by  him:  all  promissory  notes,
certificates of deposit, deposit accounts,  checks and other instruments and all
insurance  or similar  payments  or any  indemnity  payable by reason of loss or
damage to or otherwise with respect to any such property.

                                       16

<PAGE>


      In  consideration  for the Guaranty and  Security  Agreement,  the Company
issued Mr.  Perlmutter  a warrant to purchase up to five  million  shares of the
Company's  common stock.  These warrants have an exercise price of $3.11, a life
of five years and whose exercisability is determined by a calculation reflecting
the amounts guaranteed by Mr. Perlmutter.  Based on the amount outstanding under
the Credit Facility, 3,867,708 warrants were exercisable by Mr. Perlmutter. The
fair  value for the  warrants  was  estimated  at the date of  issuance  using a
Black-Scholes pricing model with the following  assumptions:  risk free interest
rate of 4.16%; no dividend  yield;  expected  volatility of 0.924;  and expected
life of five  years.  The  aggregate  value of  $10,481,489  is  included in the
Consolidated Balance Sheet as deferred financing costs and is being amortized as
interest  expense  over the three  year term of the  Credit  Facility  using the
effective interest method.

     During 2001, the Company,  through a series of transactions,  reacquired an
aggregate  $99.0  million  principal  amount of its Senior Notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The principal
amount  includes  $39.2 million with a fair value of $19.7 million  received in
satisfaction of licensing fees from a third party, as described in Note 9 to the
Consolidated  Financial  Statements.  The principal  amount also includes $46.6
million purchased from Mr. Perlmutter for $24.9 million. The Company recorded an
extraordinary  gain of $32.7  million,  net of write-offs of deferred  financing
fees of $3.2 million and income taxes of $11.3 million.

     Capital expenditures (excluding  acquisitions) by the Company during fiscal
1999,  2000 and 2001 were  approximately  $20.8 million,  $15.1 million and $7.2
million, respectively.

         The  Company  believes  that cash on hand,  cash flow from  operations,
borrowings  available under the HSBC letter of credit 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 1999,
2000 and 2001,  62%, 62% and 45%,  respectively,  of the Company's net toy sales
were realized during the second half of the year. While management  expects that
the Company's toy business  will  continue to  experience  significant  activity
during the second half of each year, management also believes that toy sales and
toy licensing  revenue  surrounding  the scheduled  releases of Spider-Man:  The
Movie (May 2002),  X-Men II, The Sequel  (Spring 2003) and The  Incredible  Hulk
(June 2003) will  mitigate  the  seasonality  in the  foreseeable  future.  This
seasonal  pattern would normally  require  significant use of working capital to
build inventory during the year and require  accurate  forecasting of demand for
the Company's products during the Christmas selling season. However, in order to
reduce the financial risk and uncertainty  associated with its toy business, the
Company (i) licensed the sale and  manufacture  of Marvel toy action figures and
accessories to TBW with the exception of Spider-Man: The Movie, (ii) shifted the
emphasis of its business to direct import and (iii) eliminated certain high risk
product categories and lines.

Critical Accounting Policies and Estimates

General

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

                                       17

<PAGE>


and by the  Audit  Committee  at the end of each  quarter  prior  to the  public
release of our financial results.  We believe the following critical  accounting
policies  affect  our  more  significant  judgments  and  estimates  used in the
preparation of our consolidated financial statements.

Revenue Recognition

Merchandise Sales, Sales Returns and Customer Allowances

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

Subscription Revenues

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

License Revenues

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

Allowance for Doubtful Accounts

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

Excess and Obsolete Inventory

     We write down our excess and  obsolete  inventory  equal to the  difference
between  the  cost of  inventory  and the  estimated  market  value  based  upon
assumptions about future product demand, consumer trends, the success of related
feature films, the availability of alternate  distribution  channels and overall
market  conditions.  If actual  product  demands,  consumer  trends  and  market
conditions  are less favorable  than those  projected by management,  additional
inventory write-downs could be required.

                                       18

<PAGE>


Molds and Tools

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

Product and Package Design Costs

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

Goodwill and Other Intangibles

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

     Effective  January 1, 2002,  the Company will adopt  Statement of Financial
Standards No. 142, "Goodwill and Other Intangible  Assets," and will be required
to analyze its goodwill  for  impairment  issues  during the first six months of
2002,  and then on a  periodic  basis  thereafter  goodwill  will no  longer  be
amortized but will be subject to an annual (or under certain  circumstances more
frequent)  impairment tests based on its estimated fair value.  Other intangible
assets that meet  certain  criteria  will  continue to be  amortized  over their
useful lives and will also be subject to an  impairment  test based on estimated
fair  value.  Estimated  fair  value is  typically  less  than  values  based on
undiscounted  operating earnings because fair value estimates include a discount
factor in valuing future cash flows.  There are many  assumptions  and estimates
underlying  the  determination  of an impairment  loss.  Another  estimate using
different,  but still  reasonable,  assumptions  could  produce a  significantly
different result. Therefore,  impairment losses could be recorded in the future.
The first of such impairment  tests is required to be performed during the first
six months of 2002

Royalties

     The Company regularly  reviews the  recoverability of its prepaid royalties
and minimum  guaranteed  commitments.  The Company  considers  factors including
actual sales,  sell through at the retail level, the overall retail  environment
and the overall  commercial success of the related and comparable feature length
movies.

                                       19
<PAGE>


Accounting for Joint Venture

     The Company has entered into a jointly owned limited  partnership with Sony
Pictures to pursue  licensing  opportunities  for motion  picture and television
related merchandise relating to the Spider-Man  character.  The Company accounts
for the activity of this joint venture under the equity method. Through December
31, 2001,  the joint venture has not recognized  any revenues.  Spider-Man:  The
Movie is scheduled for release  during 2002 at which time the joint venture will
begin recognizing revenues.

Commitments and Contingencies

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

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

Recent Accounting Pronouncements

     SFAS No. 141 and No. 142,  "Business  Combinations  and  Goodwill and Other
Intangible  Assets" - In June 2001,  the Financial  Accounting  Standards  Board
issued   Statements  of  Financial   Accounting   Standards  No.  141,  Business
Combinations   and  No.  142,   Goodwill  and  Other   Intangible   Assets  (the
"Statements"),  effective for fiscal years  beginning  after  December 15, 2001.
Under the new rules,  goodwill and intangible  assets deemed to have  indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the  Statements.  Other  intangible  assets with finite lives
will continue to be amortized over their useful lives.

     The Company will apply the new rules on  accounting  for goodwill and other
intangible  assets  beginning in the first quarter of 2002. The Company recorded
$23.5 million of goodwill  amortization during the year ended December 31, 2001.
The  Company  will test  goodwill  for  impairment  using the  two-step  process
prescribed  in  Statement  No.  142.  The first step is a screen  for  potential
impairment, while the second step measures the amount of impairment, if any. The
Company  expects  to  perform  the  first of the  required  impairment  tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 during the
first  six  months  of  2002.  Any  impairment   charge   resulting  from  these
transitional  impairment  tests will be reflected as the cumulative  effect of a
change in accounting principal in the first quarter of 2002. The Company has not
yet  determined  what the  effect of these  tests  will be on the  earnings  and
financial position of the Company.

     SFAS No. 144,  "Accounting for Impairment of Long Lived Assets" - On August
1, 2001, the FASB issued SFAS No. 144,  "Accounting for Impairment of Long Lived
Assets".  The Company is required to adopt this pronouncement  beginning January
1, 2002. SFAS No.144  prescribes the accounting for long-lived assets (excluding
goodwill)  to be disposed of by sale.  SFAS No. 144 retains the  requirement  of
SFAS No. 121 to measure  long lived  assets  classified  as held for sale at the
lower  of its  carrying  value  or fair  market  value  less  the  cost to sell.
Therefore,  discontinued  operations are no longer  measured on a net realizable
basis and future operating  results are no longer  recognized before they occur.
The impact of adopting SFAS No. 144 is not expected to be significant.

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.

                                       20
<PAGE>


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, 2001, the Company's Senior Notes debt
bore interest at a fixed rate, the Company's HSBC Credit  Facility bore interest
either at the lender's  base rate plus a margin of 2.5% or the lender's  reserve
adjusted  LIBOR rate plus a margin of 3.5% and all of the Company's  outstanding
preferred  stock earns  dividends at a fixed rate. A 10% increase or decrease in
the interest rate on the Company's  Credit Facility would not have a significant
impact on the Company's financial position or results of operation. 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
market  interest  rates will decline and the  interest  rates for the fixed rate
debt and the fixed dividend yield on the outstanding preferred stock will exceed
the then prevailing market rates.  Under its current policies,  the Company does
not utilize any interest rate  derivative  instruments to manage its exposure to
interest rate changes.

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  financial  statements  required  by  this  item,  the  report  of  the
independent  auditors  thereon  and the  related  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 16 to the December 31, 2001 Consolidated Financial Statements.

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

    Not applicable.
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

     The  following  table  sets  forth the name,  age (as of March 1, 2002) and
position  of each person who serves as an  executive  officer or director of the
Company:

Name                       Age      Position

Morton E. Handel.......    66      Chairman of the Board of Directors
Avi Arad...............    54      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..............    62      Director
Shelley F.Greenhaus....    48      Director
James F. Halpin........    51      Director
Lawrence Mittman.......    51      Director
Isaac Perlmutter.......    59      Vice Chairman of the Board of Directors
                                        and Director
Alan Fine..............    51      President and Chief Executive Officer of
                                        Toy Biz
William Jemas..........    44      President of Publishing and Consumer
                                        Products and Chief Operating Officer
Allen S. Lipson........    59      Executive Vice President, Business and
                                        Legal Affairs and Secretary
Richard Ungar..........    51      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  (Class III),  has been Chairman of the Board of Directors
of the Company since  October 1998 and was first  appointed as a director of Toy

                                       21

<PAGE>


Biz, Inc. in June 1997. Mr. Handel has been President of S&H Consulting  Ltd., a
financial consulting group, 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 serves as a director of Concurrent Computer Corp. and Linens `N
Things, Inc.

     Avi Arad (Class  II),  has been Chief  Creative  Officer of the Company and
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 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 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 co-designed  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.

     F. Peter Cuneo  (Class III),  has been the  Company's  President  and Chief
Executive  Officer since July 1999. Mr. Cuneo has been a director of the Company
since July 1999.  From  September  1998 until  July 1999,  Mr.  Cuneo  served as
Managing  Director of Cortec Group Inc., a private  equity fund.  From  February
1997 until  September  1998,  Mr. Cuneo was Chairman of Cuneo & Co.,  L.L.C.,  a
private  investment  firm.  From May 1996 until  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
until May 1996, Mr. Cuneo was President and Chief Operating Officer at Remington
Products  Company,  the predecessor to Remington  Products  Company,  L.L.C. Mr.
Cuneo is also a director of Waterpik Technologies, Inc.

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

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

     James F. Halpin  (Class I), has been a director of the Company  since March
1995. Mr. Halpin retired in March 2000 as President, Chief Executive Officer and
Chief  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  Interphase  Corporation,  a
manufacturer of high-performance  networking equipment for computers, and Lowe's
Companies, Inc., a chain of home improvement stores.

     Lawrence  Mittman  (Class II),  has been a director  of the  Company  since
October  1998.  Mr.  Mittman  is a  partner  in the law firm of Paul,  Hastings,
Janofsky & Walker LLP. For more than five years prior to June 2000,  Mr. Mittman
was a partner  in the law firm of Battle  Fowler LLP which  combined  with Paul,
Hastings, Janofsky & Walker in June 2000.

     Isaac  Perlmutter  (Class  III),  has been a director of the Company  since
April 1993 and employed as  Vice-Chairman  of the Board since November 2001. Mr.
Perlmutter  served as Chairman of the Board of Directors  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 the Company and has been an  independent  financial  investor for
the past five years. 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, and Tangible Media, Inc.,
a media buying and advertising agency.

                                       22
<PAGE>


     All of the Company's directors were designated for election pursuant to the
Stockholders'  Agreement.  Messrs.  Handel,  Arad,  Cuneo,  Halpin,  Mittman and
Perlmutter were designated by the Investor  Group.  Messrs.  Ganis and Greenhaus
were designated by the Lender Group.


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 (51)  served as a director  of the  Company  from June 1997 until
October 1998.  Mr. Fine has been  President and Chief  Executive  Officer of Toy
Biz,  Inc.  since August 2001 and served in that  capacity  from October 1998 to
April 2001.  From April 2001 until  August  2001,  Mr.  Fine was an  independent
consultant.  Previously,  he served as Chief Operating Officer of the Company, a
position  to which he was  appointed  in  September  1996.  From June 1996 until
September  1996, Mr. Fine was President and Chief  Operating  Officer of Toy Biz
International  Ltd.  From May 1995 until May 1996,  Mr. Fine was  President  and
Chief  Operating  Officer of Kay-Bee  Toys,  a national toy  retailer,  and from
December  1989 until May 1995,  Mr.  Fine was  Senior  Vice  President,  General
Merchandise Manager of Kay-Bee Toys.

     William  Jemas,  Jr. (43) has been  President  of  Publishing  and Consumer
Products  since  February 2000 and Chief  Operating  Officer since January 2002.
Previously, Mr. Jemas was Executive Vice President, Madison Square Garden Sports
from December 1998 until February 2000.  From July 1996 until December 1998, Mr.
Jemas was founder and President of Blackbox, L.L.C. and worked and consulted for
several media companies,  including Lancit Media,  G-Vox  Interactive and Hearst
Entertainment.  From July 1993 until June 1996, Mr. Jemas held various executive
positions  with MEG,  including  Executive Vice President and President of Fleer
Corporation.

     Allen S. Lipson (59) has been 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.  From October 1988 until May
1996,  Mr. Lipson was Vice President and General  Counsel of Remington  Products
Company.

     Richard E. Ungar (51) has served as  President of Marvel  Characters,  Inc.
("Marvel  Characters") since October 1999. From May 1999 until October 1999, Mr.
Ungar was a consultant  for the  Company,  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  and
producer. From January 1992 until January 1997, Mr. Ungar held various positions
with New World  Entertainment,  including President of Programming and President
and Chief Executive Officer 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 2001.

                                       23

<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  2001  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,
2001 (the "Named Executive  Officers"),  for services rendered in all capacities
to the Company and its subsidiaries during such periods.
<TABLE>
<CAPTION>
                                         Summary Compensation Table

                                           Annual Compensation(1)                     Long-Term 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)                  2001        $750,000,           --            $171,504(4)          350,000
   President and Chief Executive    2000         694,615            --              78,678(4)
   and Financial Officer            1999         295,000        $490,000                               750,000

Alan Fine                           2001         500,192            --              54,256(5)           15,000
   President and Chief Executive    2000         525,000            --               8,320(5)
   Officer of the Company's Toy     1999         500,000         225,000                               200,000
   Biz Division

Avi Arad                            2001         450,000            --                 --              100,000
   Chief Creative Officer of the    2000         375,000            --              67,137(6)
   Company and President and        1999         375,000         201,563           109,774(6)
   Chief Executive Officer of the
   Company's Marvel Studios
   Division

William Jemas (7)                   2001         325,000            --                                 145,000
   President                        2000         267,307         237,500                               175,000

Richard Ungar (8)
   President, Marvel Characters     2001         418,269(9)
                                    2000         404,808(9)     --------                                50,000
                                    1999          46,479(9)      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 for 2001 include  $152,320 for apartment and taxes associated
     therewith provided by Company,  $18,000 car allowance and $1,184 in Company
     matching  contribution to the Company's 401(k) Plan. Amounts shown for 2000
     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 for 2001 include  $44,101 for apartment and taxes  associated
     therewith  provided by Company,  $8,500 car allowance and $1,655 in Company
     matching  contribution to the Company's 401(k) Plan, Amounts shown for 2000
     are the Company's matching contribution to the Company's 401(k) Plan.

(6)  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 in 1999.

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

                                       24

<PAGE>


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

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

Option Grants Table

     The  following  table shows the  Company's  grants of stock  options to the
Named  Executive  Officers in 2001.  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 2001.
<TABLE>
<CAPTION>


                   Number of         Percent of                                   Potential Realizable
                   Shares of         Total Options                                Value at Assumed Annual Rates
                   Underlying        Granted to         Exercise      Expiration  of Stock Price Appreciation
                   Options           Employees          Price per     Date        for Option Terms
Name               in 2001           in 2001            Share
---------------    ----------        -------------      ---------     ----------  -----------------------------
                                                                                      5%              10%
                                                                                  ---------        --------
<S>                <C>               <C>                <C>           <C>         <C>              <C>
Peter Cuneo (1)     250,000            4.4%              2.500         1/15/11     $393,125        $996,250
Peter Cuneo (2)     100,000            1.8%              3.270         1/15/11      205,683         521,238
Alan Fine (1)        15,000            0.2%              2.500         1/15/11       23,587          59,775
Avi Arad (1)        100,000            1.8%              3.270         1/15/11      205,683         521,238
William Jemas (1)    75,000            1.3%              2.500         1/15/11      117,937         298,875
William Jemas (2)    70,000            1.2%              3.270         1/15/11      143,978         364,867
Rick Ungar (1)       50,000            0.8%              2.500         1/15/11       78,625         199,250

</TABLE>

(1)   Options become  exercisable in three  installments:  options to buy 20% of
      the total  became  exercisable  on the grant date of January  15, 2001 and
      options to buy 40% of the total shares of Common Stock become  exercisable
      on January 15, 2002 and January 15, 2003.

(2)      Options became exercisable on the grant date of December 28, 2001



Year-End 2001 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,
2001. No Named Executive Officers exercised stock options during 2001.

<TABLE>
<CAPTION>



                      Number of Shares of              Value of Unexercised
                      Common Stock Underlying          Value of Unexercised
                      Unexercised Options at           In-the-Money Options at
                            Year-End (1)                      Year-End
                      -----------------------------    -------------------------
Name                  Exercisable     Unexercisable    Exercisable Unexercisable
--------------        -----------     -------------    ----------- -------------
<S>                   <C>             <C>              <C>         <C>
F. Peter Cuneo.......   712,500          387,500         $452,000      $500,000
Alan Fine............   436,334           78,666            7,500        30,000
Avi Arad ............ 1,020,000           80,000           50,000       200,000
William Jemas........   143,333          176,667          266,400       150,000
Rick Ungar...........   143,334          106,666           25,000       100,000

</TABLE>

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

                                       25

<PAGE>


Compensation of Directors

     Non-employee  directors  currently  receive an annual  retainer of $25,000.
They also  received  an  annual  grant of  10,000  shares of Common  Stock to be
immediately  vested during 2000 and 2001.  In addition,  in December  2001,  the
following  options were granted  which were  immediately  vested:  35,000 to Mr.
Halpin,  30,000 to Mr. Handel and 15,000 each to Messers.  Greenhaus,  Ganis and
Mittman. 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 $215,000.

     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 Chief  Creative  Officer  of the
Company 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; William Jemas, Chief Operating Officer and President
of Publishing  and Consumer  Products;  and Richard  Ungar,  President of Marvel
Characters Group.

     Employment and License Agreements with Mr. Arad.  Pursuant to the amendment
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, 2002. Under his employment  agreement,  as amended, Mr. Arad receives a base
salary, subject to discretionary  increases,  of $375,000 and an annual bonus of
$75,000.  With  respect  to each  media  project  for  which Mr.  Arad  performs
significant  services,  Mr.  Arad is  entitled  to certain  customary  executive
producer  and/or  producer fees including  $350,000 per motion picture  project,
$10,000 per episode for animated network television projects, $7,500 per episode
for animated syndicated television projects and $20,000 per episode for one hour
live action television projects.  Mr. Arad is entitled to discretionary  bonuses
and  participation in the Company's stock option plan as determined by the Board
of  Directors.  Mr.  Arad also is entitled  to the use of an  automobile  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 replaced 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 $7,500,000.
The Company  accrued  royalties  to Mr. Arad for toys he invented or designed of
approximately  $3,000,000,  $1,600,000  and  $900,000  during  the  years  ended
December 31, 1999, 2000 and 2001,  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.

                                       26

<PAGE>


     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  and a sign-on  bonus of $100,000.  Starting in 2000,  Mr. Cuneo was
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 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  August  12,  2003.  Under  his
employment agreement,  Mr. Fine receives a base salary of $450,000.  Mr. Fine is
eligible to earn an annual bonus equal to 50% of Mr. Fine's base salary, subject
to the attainment of certain  performance goals. 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. The Company reimburses Mr.
Fine for the rent of a suitable  apartment in Manhattan,  monthly parking garage
fees and other  related  utility  charges  up to a maximum  of $4,000 per month,
until the earlier of the  expiration of his  employment or the relocation of his
primary  residence  to the New  York  City  metropolitan  area.  The  employment
agreement  further provides for the  effectiveness  and the continual vesting of
all options  previously granted to Mr. Fine as if no break in employment service
had  occurred.  From April 2001 to August  2001,  the Company  paid Mr. Fine his
monthly salary.

     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 of Directors  and provides  that Mr. Jemas shall be
entitled  to  receive a grant of options to  purchase  125,000  shares of Common
Stock.

     Employment Agreement with Mr. Ungar.  Pursuant to his employment agreement,
Mr.  Ungar has agreed to render his  exclusive  and  full-time  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.  The employment  agreement provides for 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 generally  available to the Company's  employees.  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.

                                       27

<PAGE>


     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  (with the
exception  of Mr.  Fine)  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 and Ganis serve now, and served during 2001, on the
Company's  Compensation and Nominating  Committee.  Mr. Perlmutter served on the
Company's Compensation and Nomination Committee until November 2001. None of the
individuals  mentioned  above  (other  than Mr.  Perlmutter)  was an  officer or
employee of the Company, or any of its subsidiaries, during 2001. Mr. Handel is,
and Mr. Perlmutter once was, the Company's  non-executive  Chairman of the Board
of Directors.

     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"). Each of the members of the
     Lender  Group is one of the  "Secured  Lenders"  referred  to in the Fourth
     Amended Joint Plan of  Reorganization  proposed by those "Secured  Lenders"
     and the Company in the  bankruptcy  matter of In Re:  Marvel  Entertainment
     Group,  Inc. et al. (the "Plan");  and all of the "Secured Lenders" as that
     term is defined more  broadly in the Plan are members of the "Plan  Secured
     Lender Group".

Under the  Stockholders'  Agreement,  its parties  initially agreed to take such
action as may  reasonably  be in their power to cause the Board of  Directors to
include, subject to certain conditions, six directors designated by the Investor
Group and five  directors  designated by the Lender  Group.  After July 1, 2000,
decreases in beneficial  ownership of Capital Stock by either the Investor Group
or the Lender Group below certain  pre-determined  levels,  including  decreased
that occurred prior to July 1, 2000, result in a decreased right to

                                       28

<PAGE>


designate  directors and a forfeiture  of seats on the Board of  Directors.  The
Investor  Group,  the Lender Group and the Company have agreed that decreases in
the beneficial ownership of Capital Stock by the Plan Secured Lender Group since
October 1, 1998 have resulted in the number of directors  which the Lender Group
has the right to nominate to decrease  from five  directors to three  directors.
The Stockholders' Agreement also provides for the creation of various committees
of the Board of Directors as well as the  composition of those  committees.  The
decreases in the Plan Secured  Lender  Group's  beneficial  ownership of Capital
Stock have also  caused the  number of  members of the Audit  Committee  and the
Compensation and Nominating  Committee who may be designated by the Lender Group
to decrease by one director.

     As of December 28, 2001,  the parties to the  Stockholders'  Agreement have
the power to vote,  in the  aggregate,  approximately  52.6% in combined  voting
power of the  outstanding  shares of Capital  Stock.  The 52.6%  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 (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 ) 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 of 1933,  as amended,
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 Inc.  ("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
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.


                                       29

<PAGE>


     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 receives  certain fees and commissions  based on the cost of the
placement  of such  advertising.  In  conjunction  with the actual  placement of
advertising, Tangible Media also provides the Company with the planned research,
advertising  plans,  competitive  spending  analysis and services related to the
delivery of commercials and  instructions to broadcast  outlets at no additional
cost to the Company.  Tangible Media received  payments of fees and  commissions
from the Company  totaling  approximately  $1,170,000,  $966,000 and $159,000 in
1999,  2000 and 2001,  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  for the
space,  any 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  $155,000,  $67,000 and $80,000 to the Company in 1999,
2000 and 2001, respectively.

     Agreement Relating to the Issuance and Delivery of Letters of Credit

     In  August  2001,   the  Company   entered   into  an  agreement   (the
"Substitution  Agreement") with Object Trading Corp., a corporation wholly owned
by Mr.  Perlmutter,  pursuant to which Object  Trading Corp.  agreed to have new
letters of credit  issued to replace  approximately  $12.4  million of the $17.5
million of letters of credit  outstanding  under the Citibank Credit  Agreement,
along with an additional  letter of credit for $3.4 million in  connection  with
the appeal of an adverse litigation decision.  The replacement letters of credit
were  required to be  delivered  by the  Company to  licensors  of  intellectual
property  which the  Company  uses in the  manufacture  of  various  toys and in
connection with certain advertising commitments relating to the toy business. In
accordance with the Substitution  Agreement,  Object Trading Corp.  obtained the
replacement  letters of credit  from HSBC  which,  pursuant  to the terms of the
Substitution Agreement, would remain in effect until the earlier of the date the
Company was able to close a new bank financing on terms approved by the Board of
Directors  or  November  30,  2001.  No fee was payable by the Company to Object
Trading  Corp.  under  the  Substitution  Agreement,   but  the  Company  agreed
thereunder to reimburse  Object  Trading Corp. for all  out-of-pocket  costs and
expenses  incurred  by  it  in  connection  with  opening  and  maintaining  the
replacement letters of credit, and for the amount of any payments made by Object
Trading Corp. to reimburse HSBC in the event any of the  replacement  letters of
credit were drawn upon.  The Company also granted  Object  Trading Corp. a first
security  interest in the same assets  that were  granted as security  under the
Citibank Credit Agreement.

     Payment Guarantee Agreement

     Mr.  Perlmutter  and Diamond  Comic  Distributors,  Inc,  ("Diamond")  are
parties to an agreement  whereby Mr.  Perlmutter has agreed to guarantee payment
of certain  amounts,  up to a maximum of $2.5  million,  that the  Company  owes
Diamond Select Toys and  Collectibles,  LLC ("Diamond Toys") under a Distributor
Agreement  dated  August 24, 2001 between the Company  (acting  through Toy Biz,
Inc.) and Diamond Toys (the "Distributor  Agreement") and that Marvel Characters
owes Diamond toys under a License  Agreement dated April 24, 2001 between Marvel
Characters  and Diamond Toys.  Mr.  Perlmutter is obligated to pay these amounts
owed by the Company and Marvel Characters in the event that these amounts do not
offset the  amounts  Diamond  owes the Company  pursuant to an Agency  Agreement
dated  April  24,  2001  between  the  Company  and  Diamond.  Mr.  Perlmutter's
obligation to pay any portion of these amounts automatically terminates once the
Up-Front Payment Balance (as defined in the Distributor Agreement) is reduced to
zero.

                                       30

<PAGE>


     Warrant Agreement, Warrant Registration Rights Agreement and Guaranty

     In  November  2001,  in  consideration  of Mr.  Perlmutter's  guaranty of a
portion of the  Company's  obligations  under the HSBC Credit  Facility  and any
credit support that he may provide for the Company's  obligation under its lease
for its executive  offices,  the Company and Mr.  Perlmutter  entered into (i) a
warrant  agreement  (the  "Warrant  Agreement"),  pursuant  to which the Company
granted Mr.  Perlmutter  warrants  to  purchase up to a maximum of five  million
shares of Common Stock on or before  November 30, 2006,  at an initial  exercise
price per share equal to $3.11 (the "Warrants"),  and (ii) a registration rights
agreement,   pursuant  to  which  the  Company  gave  Mr.   Perlmutter   certain
registration  rights with respect to the shares of Common Stock  issuable to him
under the  Warrant  Agreement.  The  Company  also agreed to purchase a total of
approximately  $43 million in principal  amount of the Company's Senior Notes at
an average  price of 53% of the face amount of the Notes held by Mr.  Perlmutter
pursuant to a Notes Purchase  Agreement.  Mr.  Perlmutter  purchased those Notes
with  personal  fund.  In  December,  the Company  purchased  the Notes from Mr.
Perlmutter and in January 2002,  the  shareholders  of the Company  approved the
issuance of the Warrants to Mr. Perlmutter.

     In connection with the Warrant  Agreement,  the Company and Mr.  Perlmutter
entered  into a  Warrant  Shares  Registration  Rights  Agreement,  dated  as of
November 30, 2001,  (the "Warrant  Registration  Rights  Agreement").  Under the
terms of the Warrant  Registration  Rights Agreement,  the Company has agreed to
file a shelf  registration  statement  under  the  Securities  Act of  1933,  as
amended,  registering  the resale of all shares of Common Stock  underlying  the
Warrants and to keep such registration  statement  continuously  effective until
such time as all  Warrants  have been  exercised  or have  expired.  The Warrant
Registration Rights Agreement also gives Mr. Perlmutter  piggyback  registration
rights  with  respect to  underwritten  public  offerings  by the Company of its
equity securities.

     Under the terms of the Guaranty,  Mr. Perlmutter has guarantied the payment
of the Company's  obligations  under the HSBC Credit Facility in an amount equal
to 25% of all principal obligations relating to the New Facility plus an amount,
not to exceed $10 million,  equal to the difference  between the amount required
to be in the cash  reserve  account  maintained  by the  Company  and the actual
amount  on  deposit  in such  cash  reserve  account  at the end of each  fiscal
quarter;  provided that the aggregate amount  guarantied by Mr.  Perlmutter will
not exceed $30 million.

     Employment Agreement and Stock Options

     On November 30, 2001, the Company entered into an employment agreement with
Mr. Perlmutter  pursuant to which Mr. Perlmutter is employed for a six-year term
as the Company's  Vice Chairman of the Board of  Directors.  In connection  with
such agreement,  Mr. Perlmutter was to receive, subject to shareholder approval,
options to purchase  3,950,000  shares of Common Stock at an exercise  price per
share equal to $3.30 pursuant to a nonqualified stock option agreement under the
1998 Plan.  In January  2002,  the  shareholder's  approved  the issuance of the
options  to Mr.  Perlmutter.  Under  the  terms of Mr.  Perlmutter's  employment
agreement, he will report to the Board of Directors and Chairman of the Company.
Mr.  Perlmutter's  duties shall  relate to  formulation  of  long-term  business
strategy and near term operations, including licensing activities; the Company's
assistance  with  negotiations  with motion  picture and  television  producers,
amusement and theme parks,  and video game and toy  manufacturers;  toy business
marketing;  sale of distressed  products and relationships  with major retailers
including  Toys R Us, K-B Toys,  Wal-Mart  and K-Mart;  litigation  strategy and
tactics;  and cost control.  Mr.  Perlmutter's  duties shall be performed at the
direction and under the  supervision  of the Board of Directors and Chairman and
may  include  additional  or  different  duties  assigned to him by the Board of
Directors  and  Chairman  consistent  with the  foregoing  and his  position  as
Vice-Chairman of the Board of Directors.  As compensation for his services,  Mr.
Perlmutter  will  be  entitled  to a  salary  of $1 per  year,  fringe  benefits
generally offered to the Company's executive officers, and the possibility of an
annual bonus at the discretion of the Company. The employment agreement with Mr.
Perlmutter  prohibits  disclosure of proprietary  and  confidential  information
regarding  the the Company and its  business to anyone  outside the Company both
during  and  subsequent  to his  employment  and  otherwise  provides  that  all
inventions made by Mr.  Perlmutter  during his employment belong to the Company.
In addition,  Mr.  Perlmutter  agreed during his  employment,  and for 18 months
thereafter,  not to engage in any competitive business activity.  The employment
agreement also provides that, in the event of termination,  Mr.  Perlmutter will
be entitled to certain payments and benefits  depending on the  circumstances of
the termination.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                          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 11, 2002


                                       31

<PAGE>

(based on 34,766,858  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  of the  Company,  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 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.

                                       32
<PAGE>

<TABLE>
<CAPTION>


                    Shares of Common Stock Beneficially Owned

                                              Sole Voting      Shared Voting     Sole Dispositive         Shared Dispositive
                                                 Power            Power             Power                      Power
                                         ------------------  ------------------- ------------------     ---------------------

          Five Percent Stockholders,                Percent             Percent             Percent               Percent
     Directors 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)........................     --        *     39,254,858   69.6%   5,210,000   14.5%      --          *
  1698 Post Road East
  Westport, Connecticut 06880
Isaac Perlmutter (2) (3)................     --        *     39,254,858   69.6%  24,403,819   49.6%      --          *
  P.O. Box 1028
  Lake Worth, Florida 33460
Morgan Stanley & Co. Incorporated (2)(4)     --        *     39,254,858   69.6%     --          *      5,516,061    14.5%
  1585 Broadway
  New York, New York 10036
Whippoorwill  Associates,  Incorporated
as agent of and/or general partner of        --        *      4,208,909   11.2%     --          *      4,208,909    11.2%
certain institutions and funds (5)......
  11 Martine Avenue
  White Plains, New York 10606

Mark H. Rachesky, M.D. (6)................   --        *      2,417,467    6.5%     --          *      2,417,467     6.5%
     c/o MHR Fund Management LLC
     40 West 57th Street, 33rd Floor
     New York, New York 10019
Morton E. Handel (7)......................    91,000   *         --          *      --          *          --          *
F. Peter Cuneo (8)........................   732,714  2.1%       --          *      --          *          --          *
Sid Ganis (9) ............................    50,000   *         --          *      --          *          --          *
Shelley F. Greenhaus (10) ................    60,000   *         --          *      --          *          --          *
James F. Halpin (9).......................    65,000   *         --          *      --          *          --          *
Lawrence Mittman (9)......................    60,000   *         --          *      --          *          --          *
Rod Perth.................................    50,000   *         --          *      --          *          --          *
Michael J. Petrick........................        --   *         --          *      --          *          --          *
Alan Fine (11)............................   442,334  1.3%       --          *      --          *          --          *
William Jemas, Jr. (12)...................   145,001   *         --          *      --          *          --          *
Richard E. Ungar (13).....................   163,334   *         --          *      --          *          --          *
All current  executive officers and
directors as a group (14 persons)
        (2) (14).......................... 1,983,717  5.4%   39,254,858   69.6%  29,613,819   59.0%        --          *
</TABLE>

--------
* Less than 1%.

(1)  Figures include  1,060,000  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  5,210,000  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  11,535,852 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.

                                       33

<PAGE>



(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  aresignatories to the Stockholders'  Agreement.  Shares of
     Common  Stock  beneficially  owned by  Dickstein  Partners  Inc.  and those
     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 (i) 30,000  shares of Common  Stock  subject to stock
          options granted to Mr. Perlmutter pursuant to the Stock Incentive Plan
          which are immediately exercisable;  (ii) options to purchase 3,950,000
          shares  of the  Company's  common  stock  pursuant  to the  Employment
          Agreement  between the Company and Mr. Perlmutter dated as of November
          30,  2001;  and (iii)  warrants  to purchase  4,595,000  shares of the
          Company's common stock pursuant to the Warrant  Agreement  between the
          Company and Mr. Perlmutter dated as of November 30, 2001. Other shares
          over which Mr. Perlmutter may be deemed to have sole dispositive power
          are directly held as follows:

<TABLE>
<CAPTION>

                                                                  Shares of 8%
                Holder                  Shares of Common Stock  Preferred Stock
        ------------------------        ----------------------  ----------------
        <S>                             <C>                     <C>
        Zib                                 9,256,000               --
        The Laura and Isaac Perlmutter
            Foundation Inc.                   250,000               --
         Object Trading Corp.                  33,500           4,788,479
         Classic Heroes, Inc.                   --                316,631
         Biobright Corporation                  --                316,631
         Tangible Media, Inc.                 400,000               --
         Isaac Perlmutter T.A.                 49,000             398,578
         Isaac Perlmutter                      20,000               --
</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,  (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 Capital 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 Capital Stock  directly held by
     the Laura and Isaac Perlmutter Foundation Inc.

     (b)  Except for the  24,403,819  shares  over which Mr.  Perlmutter  may be
          deemed to have sole dispositive  power (which include shares of Common
          Stock underlying 5,820,319 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 11,535,852 shares of 8%

                                       34

<PAGE>


     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)  Morgan Stanley is a party to the  Stockholders'  Agreement.  Morgan Stanley
     shares  dispositive  power over  5,516,061  shares with its parent,  Morgan
     Stanley Dean Witter & Co. Except for those 5,516,061  shares (which include
     shares of Common Stock underlying  3,263,582 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  11,535,852  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.

(5)  Whippoorwill  may be  deemed  to be the  beneficial  owner of these  shares
     (which include  shares of Common Stock  underlying  2,723,884  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  83,932  shares of Common Stock (which  include  shares of
     Common Stock  underlying  53,461 shares of 8% Preferred Stock) that are not
     subject to the Stockholders' Agreement.

(6)  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  2,248,736
     shares of 8% Preferred Stock.

(7)  Figures  include  70,000  shares of Common Stock  subject to stock  options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(8)  Figures  include  712,500  shares of Common Stock  subject to stock options
     granted   pursuant  to  the  Stock  Incentive  Plan  that  are  immediately
     exercisable  and 214 shares of Common Stock,  of which Mr. Cuneo  disclaims
     beneficial ownership, owned by Mr. Cuneo's son.

(9)  Figures  include  40,000  shares of Common Stock  subject to stock  options
     granted   pursuant  to  the  Stock  Incentive  Plan  that  are  immediately
     exercisable.

(10) Figures  include  40,000  shares of Common Stock  subject to stock  options
     granted   pursuant  to  the  Stock  Incentive  Plan  that  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.

(11) Figures  include  442,334  shares of Common Stock  subject to stock options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

                                       35

<PAGE>


(12) Figures  include  145,001  shares of Common Stock  subject to stock options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(13) Figures  include  163,334  shares of Common Stock  subject to stock options
     granted  pursuant  to  the  Stock  Incentive  Plan  which  are  immediately
     exercisable.

(14) Figures in the "Sole  Voting  Power"  column,  the  "Shared  Voting  Power"
     column,  and the "Sole  Dispositive  Power" column  include,  respectively,
     1,891,503,  9,635,000 and 9,635,000 shares of Common Stock subject to stock
     options granted  pursuant to the Stock Incentive Plan or warrants,  both of
     which are immediately exercisable.

             ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For  a  description  of  certain  relationships  and  related  transactions
involving  individuals  who served during 2001 on the Board's  Compensation  and
Nominating   Committee   (or  its   predecessor),   see  "Item   11.   Executive
Compensation-Compensation Committee Interlocks and Insider Participation."

Loan Out Agreement

     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  October 25, 2002. Under the agreement,  Brentwood  receives a producer
fee of $175,000 per year, subject to discretionary increases.

                                     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 2001, the Company
           filed the following Current Reports on Form 8-K:

           1.   Current Report on Form 8-K dated December 4, 2001, reporting
                Items 5 and 7.

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


                                   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.)

                                       36

<PAGE>


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

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

3.2     Certificate of Amendment of the Restated Certificate of Incorporation.

3.3     Bylaws (as restated and amended).

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

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

4.3     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.)

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

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

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

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

                                       37

<PAGE>



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

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

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

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

10.10   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.)

10.11   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  Quarterly  Report on Form 10-Q for the quarter ended June
        30, 1999)*

10.12   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.)*

                                       38

<PAGE>


10.13   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.)*

10.14   Amendment to Arad Employment Agreement dated January 2001.*

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

10.16   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)*

10.17   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)*

10.18   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)*

10.19   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)*

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

10.21   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   Amendment No. 1 to the 1998 Stock Incentive Plan.*

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

10.24   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.

                                       39

<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
                                        President,Chief Executive Officer, Chief
                                        Financial Officer

                                        Date: April 1, 2002


                                POWER OF ATTORNEY

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

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

Signature                              Title                           Date
--------------------     ---------------------------------------  -------------
/s/ F. Peter Cuneo
-------------------      President, Chief Executive and Chief
F. Peter Cuneo           Financial Officer and Director           March 27, 2002
                         (principal executive officer)

/s/ Morton E. Handel
--------------------      Chairman of the Board of Directors      March 27, 2002
Morton E. Handel


--------------------                  Director                    March 27, 2002
Avi Arad

s/s Sid Ganis
--------------------                  Director                    March 27, 2002
Sid Ganis

s/sShelley F. Greenhaus
------------------------              Director                    March 27, 2002
Shelley F. Greenhaus


---------------------                 Director
James F. Halpin

/s/ Lawrence Mittman
--------------------                  Director                    March 28, 2002
Lawrence Mittman


/s/ Isaac Perlmutter
---------------------                 Director                    March 27, 2002
Isaac Perlmutter


                                       40

<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, 2000 and  2001.........     F-3
Consolidated Statements of Operations for the years
        ended December 31, 1999, 2000, and 2001.......................     F-4
Consolidated Statements of Stockholders' Equity for the years
        ended December 31, 1999, 2000, and 2001.......................     F-5
Consolidated Statements of Cash Flows for the years ended
        December 31, 1999, 2000, and 2001.............................     F-6
Notes to Consolidated Financial Statements............................     F-7


Financial Statement Schedule

Schedule II-Valuation and Qualifying Accounts.........................    F-31

</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, 2001 and 2000,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December  31,  2001.  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,  2001 and 2000,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles  generally accepted in the United States.  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
March 8, 2002


                                      F-2

<PAGE>

                            MARVEL ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                   December 31,    December 31,
                                                       2000           2001
                                                   ------------   -------------
                                                         (in thousands, except
                                                               hare data)
<S>                                                <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.....................   $   22,803     $ 21,591
  Accounts receivable, net......................       39,236       35,648
  Inventories, net .............................       42,780       20,916
    Income tax receivable.......................          334          334
  Deferred financing costs......................        1,372        9,144
  Prepaid expenses and other current assets.....        6,918       12,594
                                                     --------     --------
     Total current assets.......................      113,443     $100,227

Molds, tools and equipment, net.................        7,005        8,076
Product and package design costs, net ..........        1,603        2,218
Goodwill and other intangibles, net ............      415,582      381,663
Accounts receivable, non-current portion........        8,229       11,890
Deferred charges and other assets...............          114          139
Deferred financing costs........................        7,981       13,357
                                                     --------     --------

     Total assets...............................     $553,957     $517,570
                                                     ========     ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
  STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..............................     $ 18,586     $ 13,052
  Accrued expenses and other ...................       35,879       36,210
  Current portion of credit facility............         --          6,172
  Administrative claims payable.................        7,444        3,500
  Unsecured creditors payable ..................        7,000        5,239
  Deferred revenue..............................        1,467        7,128
                                                     --------     --------
        Total current liabilities...............       70,376       71,301
Senior notes....................................      250,000      150,962
Long term  portion of credit facility...........         --         30,828
Deferred revenue, non-current portion...........         --         14,546
        Total liabilities.......................      320,376      267,637
                                                    ---------     --------
8% cumulative convertible exchangeable
redeemable preferred stock, $.01 par value,
75,000,000 shares authorized, 20,216,941
issued and outstanding in 2000 and 20,795,936
issued and outstanding in 2001, liquidation
preference $10 per share........................      202,185      207,975
                                                     --------     --------

Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000
          shares authorized, none issued........         --           --
Common stock, $.01 par value, 250,000,000
shares authorized, 41,096,278 issued and
33,702,278, outstanding in 2000 and 42,160,858
issued and 34,766,858 outstanding in 2001.......          411          421

Additional paid-in capital......................      216,068      238,769
Deficit.........................................     (152,128)    (162,897)
Accumulated other comprehensive loss............         --        (1,380)
                                                     ---------    ---------
        Total stockholders' equity before
        treasury stock..........................       64,351       74,913
Treasury stock, 7,394,000 shares................      (32,955)     (32,955)
                                                     ---------    ---------
        Total stockholders' equity .............       31,396       41,958
                                                     ---------    ---------

        Total liabilities, redeemable convertible
        preferred stock and stockholders' equity     $553,957     $517,570
                                                     =========    =========

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-3

<PAGE>



                            MARVEL ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


                                                   Years Ended December 31,
                                               ---------------------------------
                                               1999          2000        2001
                                               ----------   --------  ----------
                                                      (in thousands, except
                                                        per share data)
<S>                                            <C>          <C>       <C>
Net sales..................................... $319,645     $231,651   $181,224
Cost of sales.................................  150,858      128,531     88,709
                                               ---------    ---------  ---------

Gross profit..................................  168,787      103,120     92,515
Operating expenses:
     Selling, general and administrative......  124,596      107,447     62,048
        Pre-acquisition litigation charge.....     --           --        3,000
        Administrative claims payable no
        longer required.......................     --           --       (3,474)
     Depreciation and amortization............   18,078       30,651      5,559
     Amortization of goodwill and other
        intangibles...........................   25,857       24,012     23,764
                                               ---------    ---------  ---------

        Total expenses........................  168,531      162,110     90,897
                                               ---------    ---------  ---------

Operating income (loss).......................      256      (58,990)     1,618
Interest expense..............................   32,077       31,901     29,174
Other income, net.............................    4,043        4,223      1,055
                                               ---------   ----------  ---------

     Loss before income taxes.................  (27,778)     (86,668)   (26,501)
     Income tax expense ......................    4,482        2,927        647
     Equity in net loss of joint venture......     --           (263)      (325)
                                               ---------   ----------  ---------
     Loss before extraordinary items..........  (32,260)     (89,858)   (27,473)

Extraordinary  (loss)  gain,  net of income
        tax  benefit in 1999 of $1,021 and
        income tax expense of $11,273 in 2001    (1,531)        --       32,738
        Net (loss) income.....................  (33,791)     (89,858)     5,265
                                               ---------   ----------  ---------
Less: preferred dividend requirement..........   14,220       15,395     16,034
                                               ---------   ----------  ---------
        Net loss attributable to Common
        Stock................................. $(48,011)   $(105,253)  $(10,769)
                                               =========   ==========  =========
Basic and diluted net loss per common
        share.................................
   Loss before extraordinary item............. $  (1.39)   $   (3.13)  $  (1.27)
   Extraordinary (loss) gain..................    (0.04)        --         0.96
                                               ---------   ----------  ---------
   Net loss................................... $  (1.43)   $   (3.13)  $  (0.31)
                                               ---------   ----------  ---------
   Weighted average number of common shares...   33,533       33,667     34,322
                                               =========   ==========  =========

</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                            MARVEL ENTERPRISES, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                                       Add'l                  Accumulated
                                                Common      Common    Paid-in    Retained     Other
                                                Stock       Stock     Capital    Earnings     Comprehensive    Treasury      Total
                                               ---------    --------  ---------- ---------    -------------    ----------  --------
                                                                                (in thousands)
<S>                                            <C>          <C>       <C>        <C>          <C>              <C>
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

Conversion of preferred to common stock........   1,065            10    10,234        --           --               --      10,244
Stock warrants exercised by stockholders.......      --         --            5        --           --               --           5
Stock warrants issued to third parties.........      --         --       12,462        --           --               --      12,462
Preferred dividend declared....................      --         --          --     (16,034)         --               --     (16,034)

Net income.....................................      --         --          --       5,265          --               --       5,265
Other Comprehensive loss.......................      --         --          --         --        (1,380)                     (1,380)
                                               ---------     --------- ---------  ---------   ----------       ---------- ----------
Comprehensive income...........................      --         --          --         --           --               --       3,885
                                               ---------     --------- ---------  ---------   ----------       ---------- ----------
Balance at December 31, 2001...................  34,767      $    421  $238,769  ($162,897)     ($1,380)        $ 32,955   ($41,958)
                                               =========     ========= =========  =========   ==========       ========== ==========

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-5

<PAGE>
                            MARVEL ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                               ---------------------------------
                                                 1999         2000        2001
                                               ---------    ---------  ---------
                                                       (in thousands)
<S>                                            <C>          <C>        <C>
Net (loss) income............................  ($33,791)    ($89,858)   $ 5,265
Adjustments to reconcile net loss (income)
  to net cash provided by (used in)
  operating activities:
    Depreciation and amortization............    43,935       54,663     29,323
    Provision for doubtful accounts..........     1,721           81      3,470
    Amortization of deferred financing
       charges...............................     2,888        1,384      2,136
    Deferred income taxes....................     2,922          --         --
    Pre-acquisition litigation charge........       --           --       3,000
    Administrative claims no longer
        required.............................       --           --      (3,474)
    Extraordinary item, net..................     1,531          --     (32,738)
    Changes in operating assets and
        liabilities:
      Accounts receivable....................    (7,544)     16,524      (3,543)
      Inventories............................    (6,798)     (3,395)     21,864
      Goodwill...............................        --         798         --
      Income tax receivable..................     6,069        (334)        --
      Prepaid expenses and other.............      (774)     (2,475)     (5,676)
      Deferred charges and other assets......    (2,315)     (1,831)        (25)
      Equity in net loss of joint venture....       --          263         325
      Accounts payable, accrued expenses
        and other ...........................    (7,029)        (49)    (11,114)
                                               ---------     --------- ---------
Net cash provided by (used in)
        operating activities.................       815      (24,229)     8,813
                                               ---------     --------- ---------
Cash flow used in investing activities:

      Payment of administrative claims, net..   (10,013)      (3,553)    (2,231)
      Net proceeds from sale of Fleer and
        settlement of Panini.................    11,980          --         --
     Purchases of molds, tools and
        equipment............................   (13,660)      (8,483)    (4,311)
     Expenditures for product and package
        design costs.........................    (7,136)      (6,601)    (2,934)
     Other intangibles.......................      (181)         (31)      (516)
     Distributions from joint venture........       --           --       1,081
                                               ---------     --------- ---------
     Net cash used in investing activities.     (19,010)     (18,668)    (8,911)
                                               ---------     --------- ---------

Cash flow from financing activities:
     Payments of bridge facility.............  (200,000)         --          --
     Proceeds from senior notes offering,
        net of offering costs of $11,022.....   238,978          --          --
     Repurchase of Senior Notes..............       --           --     (32,108)
     Proceeds from credit facility...........       --           --      37,000
     Deferred financing costs................       --           --      (6,011)
     Exercise of stock options...............       147          381        --
     Issuance of common stock................         1          500        --
     Proceeds from exercise of
        stock warrants.......................       192            5          5
                                               ---------     --------- ---------
     Net cash provided by (used in)
        financing activities.................    39,318          886     (1,114)
                                               ---------     --------- ---------
     Net increase (decrease) in cash
        and cash equivalents.................    21,123      (42,011)    (1,212)
     Cash and cash equivalents at
        beginning of year....................    43,691       64,814     22,803
                                               ---------     --------- ---------
     Cash and cash equivalents at
        end of year..........................  $ 64,814     $ 22,803   $ 21,591
                                               =========     ========= =========

Supplemental disclosure of cash flow information:
     Interest paid during the year...........  $ 29,768     $ 30,348   $ 15,362
     Net income taxes (recovered) paid
        during the year......................    (4,172)       1,333      2,494
Other non-cash transactions:
     Preferred stock dividends...............    14,220       15,395     16,034
     Warrants issued in connection with
        credit facility......................       --           --      12,462
     Value of Senior Notes received in
        satisfaction of licensing fees from
        a third party.........................      --           --      20,000
</TABLE>
                 See Notes to Consolidated Financial Statements.
                                      F-6

<PAGE>

                            MARVEL ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2001

1.  Description of Business and Basis of Presentation

     The Company designs,  markets and distributes a limited line of toys to the
worldwide   marketplace.   The  Company's  products  are  primarily  based  upon
Spider-Man:  The Movie  and the  movie  trilogy  based  upon Lord of the  Rings.
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.

     On October 1, 1998,  pursuant to the Plan  proposed  by the senior  secured
lenders  of MEG and Toy Biz,  Inc.  (the  "Plan"),  MEG  became  a  wholly-owned
subsidiary  of Toy Biz,  Inc.  Toy Biz,  Inc.  also  changed  its name to Marvel
Enterprises,  Inc. on that date. The  acquisition of MEG was accounted for using
the purchase  method of  accounting.  The 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, 2001

      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.

     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.

                                      F-8

<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

     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 a 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.

     During 1999,  the Company  finalized  certain  preliminary  portions of the
purchase price allocation  relating to its acquisition of MEG. The completion of
the purchase price  allocation in 1999 resulted in a net decrease in goodwill of
$21,694,000.  The Company's results of operations for 1999 do not include the
results of operations of Fleer and Panini.

     During 2001, the Company concluded that $3,474,000 of the liability related
to administrative expense claims included in the final purchase price allocation
was no longer  required.  A reduction  in the  liability  Administrative  Claims
Payable was included in the accompanying  Consolidated  Statement of Operations.
In  addition,  during  2001 the  Company  realized  an  income  tax  benefit  of
approximately  $10,670,000  related to the pre-acquisition net operating losses.
This  amount  was  recorded  as a  reduction  of  goodwill  attributable  to the
acquisition of MEG.

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 judgment  relate to  provisions  for
returns,  other sales  allowances and doubtful  accounts,  future  revenues from
episodic television series, the realizability of inventories, goodwill and other
intangible  assets,  and the reserve for minimum royalty  guarantees and minimum
advances,  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-9

<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

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, 2001, 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, 1999, 2000 and 2001 were approximately $146,000, $9,205,000 and $1,295,0000,
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, 2001,  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,  1999,  2000  and  2001  were
approximately $486,000, $7,585,000 and $1,540,000 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,
1999,  2000 and  2001,  amortization  of  goodwill  and  other  intangibles  was
approximately $25,857,000, $24,012,000 and $23,764,000, respectively.

                                      F-10

<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001


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. See "Recent Accounting Pronouncements, SFAS No. 144".

Deferred Financing Costs

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

Comprehensive Income (Loss)

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

Research and Development

     Research  and  development  ("R&D")  costs are  charged  to  operations  as
incurred.  For the years ended  December 31, 1999,  2000 and 2001,  R&D expenses
were $6,366,000, $13,157,000 and $8,834,000, 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.  Income related to the
licensing of animated  television  series are recorded in accordance  with AICPA
Statement of Position 00-2  "Accounting by Producers or  Distributors of Films."
Under these  guidelines,  revenue is  recognized  when the  animated  television
series is available to the licensee and collection is reasonably assured.

                                      F-11
<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001


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, 1999,  2000 and 2001,
advertising expenses were $39,267,000, $36,211,000 and $6,637,000, respectively.
At  December  31, 2000 and 2001 the Company  had  incurred  $9,000 and  $148,000
respectively, of prepaid advertising costs, principally related to production of
advertisement that will be first run in fiscal 2001 and 2002, 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 minimum  guarantees  committed  are  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 carrying  amount of  borrowings  under the credit  facility are
estimated  to  approximate  their  fair  value  as  the  stated  interest  rates
approximate current rates

     The estimated fair values of the Company's Senior Notes and outstanding 8%
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:

                                      F-12
<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

<TABLE>
<CAPTION>


                                      December 31, 2000       December 31, 2001
                                  ------------------------  --------------------
                                    Carrying    Estimated   Carrying  Estimated
                                    Amount      Fair Value  Amount    Fair Value
                                  -----------   ----------  --------- ----------
                                                (in thousands)
             <S>                  <C>           <C>         <C>       <C>
             Senior Notes......... $250,000     $ 92,250     $150,962  $ 80,010
             8% Preferred Stock... $202,185     $ 35,380     $207,975  $ 72,786

</TABLE>

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 loss  attributable  to common  stock 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.

Recent Accounting Pronouncements

     SFAS No, 141 and No. 142,  Business  Combinations  and  Goodwill  and Other
Intangible  Assets - In June 2001,  the  Financial  Accounting  Standards  Board
issued   Statements  of  Financial   Accounting   Standards  No.  141,  Business
Combinations   and  No.  142,   Goodwill  and  Other   Intangible   Assets  (the
"Statements"),  effective for fiscal years  beginning  after  December 15, 2001.
Under the new rules,  goodwill and intangible  assets deemed to have  indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the  Statements.  Other  intangible  assets with finite lives
will continue to be amortized over their useful lives.

                                      F-13
<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001


         The Company  will apply the new rules on  accounting  for  goodwill and
other  intangible  assets  during  the first six  months  of 2002.  The  Company
recorded  approximately  $23.5 million of goodwill  amortization during the year
ended December 31, 2001. The Company will test goodwill for impairment using the
two-step process prescribed in Statement No. 142. The first step is a screen for
potential  impairment,  while the second step measures the amount of impairment,
if any.  The  Company  expects to perform the first of the  required  impairment
tests of goodwill and indefinite lived intangible  assets as of January 1, 2002.
Any impairment charge resulting from these transitional impairment tests will be
reflected as the  cumulative  effect of a change in accounting  principal in the
first  quarter of 2002.  The Company has not yet  determined  what the effect of
these tests will be on the earnings and financial position of the Company.

       SFAS No. 144,  Accounting For Impairment of Long Lived Assets - On August
1, 2001, the FASB issued SFAS No. 144,  "Accounting for Impairment of Long Lived
Assets".  The Company is required to adopt this pronouncement  beginning January
1, 2002. SFAS No.144  prescribes the accounting for long lived assets (excluding
goodwill)  to be disposed of by sale.  SFAS No. 144 retains the  requirement  of
SFAS No. 121 to measure  long lived  assets  classified  as held for sale at the
lower  of its  carrying  value  or fair  market  value  less  the  cost to sell.
Therefore,  discontinued  operations are no longer  measured on a net realizable
basis and future operating  results are no longer  recognized before they occur.
The impact of adopting SFAS No. 144 is not expected to be significant.

Reclassifications

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

                                      F-14

<PAGE>

                            MARVEL ENTERPRISES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2001

3.   Details of Certain Balance Sheet Accounts
<TABLE>
<CAPTION>
                                                             December 31,
                                                          ------------------
                                                           2000       2001
                                                          --------  --------
                                                            (in thousands)
<S>                                                       <C>       <C>
Accounts receivable, net, consists of the following:

   Accounts receivable..................................  $ 63,171  $ 52,761

   Less allowances for:
     Doubtful accounts..................................    (4,542)   (5,275)
     Advertising, markdowns, returns, volume
        discounts and...................................   (19,393)  (11,838)

                                                          --------- ---------
          Total.........................................  $ 39,236  $ 35,648
                                                          ========= =========

Inventories, net, consist of the following:
   Toys:
     Finished goods.....................................  $ 31,026  $ 12,039
     Component parts, raw materials and
        work-in-process.................................     8,001     3,849
                                                          --------- ---------
          Total Toys....................................    39,027    15,888
                                                          --------- ---------
   Publishing:
     Finished goods.....................................       298     1,411
     Editorial and raw materials........................     3,455     3,617
                                                          --------- ---------
         Total publishing...............................     3,753     5,028
                                                          --------- ---------

         Total..........................................  $ 42,780  $ 20,916
                                                          ========= =========

Molds, tools and equipment, net, consists of the following:
   Molds, tools and equipment...........................  $ 31,060  $  3,410
   Office equipment and other...........................    10,163    12,096
   Less accumulated depreciation and amortization.......   (34,218)   (7,430)
                                                          --------- ---------
          Total.........................................  $  7,005  $  8,076
                                                          ========= =========

Product and package design costs, net,
        consists of the following:
   Product design costs.................................  $ 13,065  $  2,255
   Package design costs.................................     6,248       864
   Less accumulated amortization........................   (17,710)     (901)
                                                          --------- ---------
          Total.........................................  $  1,603  $  2,218
                                                          ========= =========
Goodwill and other intangibles, net,
        consists of the following:
   Goodwill.............................................  $469,683  $459,012
   Patents and other intangibles........................     3,933     4,448
   Less accumulated amortization........................   (58,034)  (81,797)
                                                          --------- ---------
          Total.........................................  $415,582  $381,663
                                                          ========= =========

Accounts receivable, non -current portion are due as follows:
   2002.................................................   $ 5,485  $    --
   2003.................................................     1,771     7,927
   2004.................................................       575     3,050
   2005 and thereafter..................................     2,000     2,850
   Allowances and discounting...........................    (1,602)   (1,937)
                                                          --------- ---------
          Total.........................................   $ 8,229  $ 11,890
                                                          ========= =========

Accrued expenses and other consists of the following:
   Accrued advertising costs............................   $ 6,802  $  1,817
   Accrued royalties....................................     6,064     2,737
   Inventory purchases..................................     3,630     1,443
   Income taxes payable.................................     5,070     2,051
   MEG acquisition accruals.............................     4,135     1,857
   Accrued expenses - Fleer sale including
        pension benefits................................     2,653     3,946
   Pre-acquisition litigation charge....................       --      3,000
   Accrued interest expense.............................     1,408     9,971
   Other accrued expenses...............................     6,117     9,388
                                                          --------- ---------
          Total.......................................     $35,879   $36,210
                                                          ========= =========
</TABLE>
                                      F-15
<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

4.   Debt Financing

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

     In  February  1999,  the  Company  recorded  an  extraordinary   charge  of
approximately  $1.5  million,  net of tax benefit for the  write-off of deferred
financing costs in connection  with the repayment of certain  interim  financing
facilities.

     On October 5, 2001, the Company  terminated its Revolving  Credit  Facility
with Citibank N.A., and replaced $12.4 million of letters of credit  outstanding
under the Citibank  Facility with letters of credit guaranteed by Object Trading
Corp.  ("Object  Trading"),  a corporation  wholly-owned by Isaac Perlmutter,  a
director, employee and major stockholder of the Company as well as Vice-Chairman
of the  Board  of  Directors.  The $3.4  million  letter  of  credit  issued  in
connection  with the appeal in the MacAndrews & Forbes  litigation (See Note 13)
was also guaranteed by Object  Trading.  The Company granted to Object Trading a
first  security  interest in the same assets that were granted as security under
the Citibank agreement.

     On  November  30,  2001,  the  Company  and HSBC Bank USA  entered  into an
agreement for an $80 million  senior credit  facility (the "Credit  Facility") .
The Credit  Facility is  comprised of a $20 million  revolving  letter of credit
facility  renewable  annually  for up to three years and a $60 million  multiple
draw three year amortizing term loan facility  available until January 31, 2002.
Prior to January 31 ,2002,  the Company drew down $37 million  which was used to
finance the  repurchase a portion of the Company's  Senior Notes.  The term loan
facility amortizes quarterly over three years with the outstanding principal due
and payable on December 31, 2004.  At the option of the Company,  the term loans
bear  interest  either  at the  lender's  base rate plus a margin of 2.5% or the
lender's reserve adjusted LIBOR rate plus a margin of 3.5% (5.4% at December 31,
2001).  The Company may prepay the term loans applying the base rate at any time
without penalty, but may only prepay the LIBOR rate loans without penalty at the
end of the  applicable  interest  period.  The  letter of credit  facility  is a
one-year facility subject to annual renewal,  expiring on the date which is five
days prior to the final maturity for the term loan  facility.  The $15.8 million
of  letters of credit  previously  issued by Object  Trading  were  replaced  by
letters  of  credit  issued  by HSBC  Bank USA.  The  Credit  Facility  contains
customary  mandatory  prepayment  provisions  for  facilities  of  this  nature,
including an excess cash flow sweep. It also contains customary event of default
provisions and covenants  restricting  the Company's  operations and activities,
including  the  amount  of  capital  expenditures,  and  also  contains  certain
covenants  relating  to the  maintenance  of  minimum  net  worth  and a minimum
interest  coverage and leverage ratio and restrictions on paying cash dividends.
The Credit Facility is secured by (a) a first priority  perfected lien in all of
the assets of the Company;  (b) a first  priority  perfected  lien in all of the
capital  stock  of  each of the  Company's  domestic  subsidiaries;  (c) a first
priority  perfected  lien in 65% of the capital  stock of each of the  Company's


                                      F-16
<PAGE>



                            MARVEL ENTERPRISES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                                December 31, 2001


foreign  subsidiaries;  and (d) cash  collateral  to be placed in a cash reserve
account in an amount  equal to at least $10  million  at the end of each  fiscal
quarter.

     In consideration  for the Credit Facility,  the Company issued a warrant to
HSBC to purchase  up to 750,000  shares of the  Company's  common  stock.  These
warrants have an exercise price of $3.62,  a life of five years.  The fair value
for the warrants was estimated at the date of issuance  using the  Black-Scholes
pricing model with the following assumptions:  risk free interest rate of 4.16%;
no dividend  yield;  expected  volatility  of 0.924;  and expected  life of five
years. The aggregate value of $1,980,000 included in deferred financing costs on
the  Consolidated  Balance  Sheet  and is being  amortized  over the term of the
Credit Facility using the effective interest method.

     In connection with the Credit  Facility,  the Company and Isaac  Perlmutter
entered into a Guaranty and Security Agreement. Under the terms of the Guaranty,
Mr. Perlmutter has guaranteed the payment of the Company's obligations under the
Credit Facility in an amount equal to 25% of all principal  obligations relating
to the Credit Facility plus an amount,  not to exceed $10 million,  equal to the
difference  between  the  amount  required  to be in the  cash  reserve  account
maintained  by the Company and the actual amount on deposit in such cash reserve
account at the end of each fiscal  quarter;  provided that the aggregate  amount
guaranteed by Mr. Perlmutter will not exceed $30 million. Under the terms of the
Security  Agreement,  Mr. Perlmutter has provided the creditors under the Credit
Facility with a security  interest in the following  types of property,  whether
currently  owned  or  subsequently   acquired  by  him:  all  promissory  notes,
certificates of deposit, deposit accounts,  checks and other instruments and all
insurance  or similar  payments  or any  indemnity  payable by reason of loss or
damage to or otherwise with respect to any such property.

     In  consideration  for the  Guaranty and  Security  Agreement,  the Company
issued Mr.  Perlmutter  a warrant to purchase up to five  million  shares of the
Company's  common stock.  These warrants have an exercise price of $3.11, a life
of five years and whose exercisability is determined by a calculation reflecting
the amounts guaranteed by Mr. Perlmutter.  Based on the amount outstanding under
the Credit Facility,  3,867,708  warrants were exercisable by Mr.  Perlmutter at
December 31, 2001.  The fair value for the warrants was estimated at the date of
issuance using the Black-Scholes  pricing model with the following  assumptions:
risk free  interest rate of 4.16%;  no dividend  yield;  expected  volatility of
0.924;  and expected life of five years. The aggregate value of the excercisable
warrants was  $10,481,489 and is included in the  Consolidated  Balance Sheet as
deferred  financing  costs and is being  amortized as interest  expense over the
three year term of the Credit Facility using the effective interest method.

        During 2001, the Company,  through a series of transactions,  reacquired
an aggregate $99.0 million  principal amount of its Senior Notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The principal
amount  includes  $39.2 million with a fair value of $19.7  million  received in
satisfaction  of licensing fees from a third party,  as described in Note 9. The
principal amount also includes $46.6 million  purchased from Mr.  Perlmutter for
$24.9 million.  The Company recorded an extraordinary gain of $32.7 million, net
of  write-offs  of deferred  financing  fees of $3.2 million and income taxes of
$11.3 million.

5.   Stockholders' Equity

     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

                                      F-17

<PAGE>




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

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,  2001,  the Company  issued
396,748,  398,286,  400,567 and 407,725  shares,  respectively,  of 8% Preferred
Stock in payment of dividends  declared and payable to stockholders of record on
those dates. During the year ended December 31, 2001, 1,024,282 preferred shares
were converted to common stock.

     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, 2001, the Company had reserved shares
        of common stock for issuance as follows:
     Conversion of 8% preferred stock.........................    21,606,978
     Exercise of common stock purchase warrants...............    14,499,708
     Exercise of common stock options.........................     9,717,541
                                                                ------------
                                                        Total     45,824,227
                                                                ============
</TABLE>

6.   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,  provided that the number of shares of Common Stock that may be
the subject of awards granted to any individual during any calendar year may not
exceed one million shares.

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

                                      F-18

<PAGE>



                            MARVEL ENTERPRISES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2001

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

                                                            Option     Weighted
                                                            Price per  Average
                                                 Shares      Share     Exercise
                                              ----------  ----------- ----------
<S>                                           <C>         <C>         <C>
Outstanding at December 31, 1998.............  3,551,000   $5.88-$6.25
Canceled.....................................   (379,250)                $6.06
Exercised....................................    (25,000)                $5.88
Granted (under 1998 Stock Incentive Plan)....  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   $4.31-$7.38   $6.21
Canceled..................................... (1,035,209)                $5.63
Exercised....................................        --                  $  --
Granted......................................  5,680,000                 $3.37
Outstanding at December 31, 2001.............  9,717,541   $2.38-$7.38   $4.61
Exercisable at December 31, 2001.............  8,205,040   $2.50-$7.38   $4.67

</TABLE>

     Options  granted in 1998 under the Stock  Incentive  Plan vest generally in
four equal  installments  beginning with the date of the grant.  Options granted
subsequent to 1998 vest generally in three equal installments beginning 12
months after the date of grant.  At December  31, 2001,  6,032,709 shares were
available for future grants of options and rights.  At December 31, 2001, the
weighted average remaining contractual life of the options outstanding
is 8.50 years.

     On  November  30 2001,  the  Company  entered  into a six  year  employment
agreement with Mr. Perlmutter.  The agreement, among other things provides for a
minimal salary and a six year warrant to purchase  3,950,000  common shares at a
price of $3.30 per share.  The  warrant  may be  exercised  at any time.  Shares
obtained  under the warrant are  restricted  shares  until they fully vest.  The
vesting  period  for the  shares  is one  third on the  fourth,  fifth and sixth
anniversary  of the  agreement.  At  December  31,  2001,  this  warrant was not
exercised in whole or in part.

     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-19
<PAGE>

                        MARVEL ENTERPRISES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2001

<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                               ---------------------------------
                                                  1999        2000        2001
                                               ----------   ---------  ---------
                                                       (in thousands, except
                                                           per share data)
<S>                                            <C>          <C>        <C>
Net (loss) income, as reported.............     ($33,791)   ($89,858)   $ 5,265
Pro forma net (loss) income................      (39,214)    (94,972)       885
Pro forma net (loss) per share
    attributable to Common Stock -- basic
    and diluted.............................      ( 1.59)     ( 3.28)      (.44)
</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
1999 of:  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 weighted average  assumptions for the 2001
grants are:  risk free interest  rates ranging from 2.91% to 4.90%:  no dividend
yield;  expected  volatility  of 0.920:  and expected  life of three years.  The
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.

7.    Joint Venture

         The Company has entered into a jointly owned limited  partnership  with
Sony  Pictures  to  pursue  licensing   opportunities  for  motion  picture  and
television related merchandise relating to the Spider-Man character. The Company
accounts for the activity of this joint  venture under the equity method and has
recognized  losses of  approximately  $263,000  and $325,000 for the years ended
December 31, 2000 and 2001,  respectively.  Through December 31, 2001, the joint
venture has not recorded any revenues.

8.   Sales to Major Customers and International Operations

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

     During the year ended December 31, 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. During the year ended December 31, 2001, three customers
accounted for approximately 18%, 18 % 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,  1999,   2000  and  2001,
international  sales were  approximately  15%, 28%, and 23 %,  respectively,  of
total net toy sales.  During the years ended  December 31, 1999,  2000 and 2001,
the Hong Kong operations reported operating income of approximately  $5,055,000,
$7,198,000 and $519,000 and income before income taxes of $5,472,000, $7,410,000
and  $888,000,  respectively.  At December  31,  2000 and 2001,  the Company had
assets in Hong Kong of approximately  $4,583,000 and $4,317,000,  respectively


                                      F-20

<PAGE>

                            MARVEL ENTERPRISES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                December 31, 2001

excluding  amounts due from the Company.  The Hong Kong  subsidiary  represented
$38,057,000  and  $39,315,000,   respectively,  of  the  Company's  consolidated
retained earnings during the years ended December 31, 2000 and 2001.

9.   Restructuring of Toy Biz Operations

     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
inventories to net realizable value,  write-offs of molds, 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....           800
     Depreciation and amortization.........        16,800
                                                 --------
                                                 $ 22,900
                                                 ========
</TABLE>




     During  2001,  the Company  entered into a license  agreement  with Toy Biz
Worldwide,  Ltd ("TBW"), an unrelated entity,  covering the manufacture and sale
of toy action figures and accessories of all Marvel  characters other than those
based upon the upcoming  Spider-Man movie. TBW opted to use the Toy Biz name for
marketing purposes, but Marvel has no ownership in TBW nor any other obligations
or  guarantees.  The license  agreement has a term of 66 months and included the
payment to Marvel of a minimum guaranteed royalty of $20.0 million. In addition,
the Company and TBW have entered into other  agreements which requires Marvel to
provide TBW with certain  administrative and management support for which TBW is
to reimburse Marvel.  For the six months ended December 31, 2001 the Company was
reimbursed approximately $1.7 million for administrative and management support.
The company is recognizing  the revenue related to this license over the term of
the  agreement.  As of December  31,  2001,  the Company has deferred a total of
$17.8  million of the  minimum  guaranteed  royalty,  of which  $3.2  million is
classified as current liabilities.

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

     In  addition  to toys  related to  Spider-Man:  The Movie  characters,  the
Company   continues  to  distribute  toys  based  on  certain  other  non-Marvel
characters.  These  operations  are  not  effected  by  the  license  and  other
arrangements with TBW.

10.   Income Taxes

     Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                              ---------  ---------    --------
                                                1999       2000         2001
                                              ---------  ---------    --------
                                                     (in thousands)
<S>                                           <C>        <C>          <C>
Current:
     Federal...........................       $ (146)    $   --        $ --
     State.............................          534        431         384
     Foreign...........................        1,172      1,698         263
                                              ---------  --------    ---------
                                               1,560      2,129         647
Deferred:
     Federal...........................        2,794        642          --
     State.............................          128        156          --
                                              ---------  --------    ---------
                                               2,922        798          --
                                              ---------  --------    ---------
Income tax expense ....................       $4,482     $2,927        $647
                                              =========  ========    =========

</TABLE>

                                      F-21
<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

     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,
                                                   -----------------------------
                                                      1999      2000       2001
                                                   ---------  --------  --------
<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...       1.9%      0.4%      1.0%
Non-deductible amortization expense.............      30.0%      9.2%     31.5%
Foreign taxes...................................       2.9%      1.5%      1.0%
Purchase accounting.............................      17.1%     (2.1%)   (12.2%)
Increase in valuation allowance.................        --      29.7%     16.7%
Other...........................................      (0.8%)    (0.3%)    (0.5%)
Total provision for income taxes................      16.1%      3.4%      2.5%

</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,
                                                          ---------------------
                                                            2000       2001
                                                          --------- ---------
                                                             (in thousands)
    <S>                                                   <C>       <C>

    Deferred tax assets:

            Accounts receivable ......................    $  4,933  $  5,599
            Inventory.................................       9,029     2,973
            Sales returns reserves....................       1,736     2,443
            Employment reserves.......................       4,091     4,073
            Restructuring and other reserves..........       1,505     2,866
            Reserve related to foreign investments....       3,546     4,293
            Net operating loss carryforwards..........      85,704    75,928
            Tax credit carryforwards..................       3,145     3,145
            Other.....................................         274       222
                                                          --------- ---------
            Total gross deferred tax assets...........     113,963   101,542
            Less valuation allowance..................    (106,594)  (92,851)
            Net deferred tax assets...................       7,369     8,691
                                                          --------- ---------
   Deferred tax liabilities:
            Depreciation/amortization ................         438     3,620
            Licensing, net............................       6,931     5,071
                                                          --------- ---------
            Total gross deferred tax liabilities......       7,369     8,691
                                                          --------- ---------
            Net deferred tax asset (liability)........    $     --  $     --
                                                          ========= =========

</TABLE>


                                     F-22


<PAGE>




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

     During 2000 and 2001, 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, 2001  includes  $24.8
million which, if realized, will be accounted for as a reduction of goodwill.

     At December 31,  2001,  the Company  expects to have Federal net  operating
loss  carryforwards of approximately  $157.7 million.  These loss  carryforwards
will expire in years 2007 through 2021. Of the total Federal loss carryforwards,
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  $330.8 million. The
state and local loss carryforwards will expire in various jurisdictions in years
2002 through 2021. 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, 2001.

11.   Quarterly Financial Data (Unaudited)

     Summarized quarterly financial information for the years ended December 31,
2000 and 2001 is as follows:
<TABLE>
<CAPTION>

                                      2000                                  2001
                      ----------------------------------   -------------------------------------------
Quarter Ended         Mar. 31  June 30  Sept.30  Dec. 31    March 31    June 30    Sept. 30    Dec 31
                      -------- -------- -------- -------   ----------   --------   ---------   -------
                               (in thousands, except per share data)
<S>                   <C>      <C>      <C>      <C>       <C>          <C>        <C>         <C>
Net sales............ $43,187  $51,041  $73,461  $63,962    $42,672     $45,932    $43,026     $49,594
Gross profit.........  20,838   26,713   34,546   21,023     18,349      23,529     19,838      30,799
(Loss) income before
 extraordinary gain..  (9,277)  (2,384)    (520) (46,809)      (570)         90       (910)      3,008
Extraordinary gain...      --       --       --       --         --          --     13,645      19,093
Net (loss) income.... (16,646)  (10,587) (9,196) (53,429)    (8,687)     (7,404)    (1,104)     22,460
Preferred dividend
 Requirement.........   3,735     3,810   3,886    3,964      3,968       3,983      4,006       4,077
Net(loss) income
attributable to common
shares............... (20,381)  (14,397)(13,082) (57,393)   (12,655)    (11,387)    (5,110)     18,383
Basic and dilutive
net loss before
extraordinary gain
per common share.....  ($0.61)   ($0.43) ($0.39)  ($1.70)    ($0.37)     ($0.33)    ($0.54)     ($0.02)

</TABLE>

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

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

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


                                      F-23

<PAGE>




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001



     12.   Related Party Transactions

      Mr.  Perlmutter indirectly owns approximately $34.9 million of the
Company's 8% Preferred Stock obtained in connection with the Plan.

      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, 1999,
2000 and 2001, the Company paid fees and  commissions to the affiliate  totaling
approximately $1,170,000, $966,000 and $159,000, respectively,  relating to such
advertisements.

     The Company accrued  royalties to Mr. Arad for toys he invented or designed
of $2,981,000, $1,551,000 and $866,000 during the years ended December 31, 1999,
2000 and 2001, respectively.  An affiliate of the Company, which is wholly-owned
by Mr. Arad,  provides  production  services in  connection  with the  Company's
animated  television series.  During the years ended December 31, 2000 and 2001,
the Company  paid  production  fees to this  affiliate  of $70,000 and  $150,000
respectively.  At December 31, 2000 and 2001,  the Company had an accrual to Mr.
Arad of $378,000 and $182,000, 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,  1999,   2000  and  2001  was   $106,000,   $67,000  and  $80,000,
respectively.  While  certain costs are not  allocated  among the entities,  the
Company believes that it bears its proportionate share of these costs.

     The  Company  has  entered  into  an  agreement   granting  the   exclusive
distribution  rights to an unrelated  entity to sell Marvel character based toys
to specialty stores in the U.S.  Included in deferred revenues is a $2.5 million
prepayment received by the Company for future toy purchases.  Any unused portion
of this prepayment has been guaranteed by Mr. Perlmutter.

        The Company paid producer fees in regards to its television series to a
Company  wholly  owned by a Director  and  employee  of  approximately  $46,000,
$155,000 and $168,000  during the years ended December 31, 1999,  2000 and 2001,
respectively.

     The Company reimbursed Mr. Perlmutter for $7,927 in legal fees in
connection with his Guaranty of the Credit Facility.

13.  Commitments and Contingencies

     In June 2000,  the Company  entered into a lease  agreement for a corporate
office facility.  The lease term, which is approximately 5 1/2 years,  commenced
on or about April 1, 2001 and terminates on July 31, 2006. At December 31, 2001,
the Company has a rent deposit with the landlord in the amount of $4.4 million.

      The Company is a party to various other  non-cancelable  operating  leases
involving  office and  warehouse  space  expiring on various dates from May 2005
through  April  2010.  The leases are  subject to  escalations  based on cost of
living  adjustments and tax allocations.  Minimum future  obligations  under all
operating leases are as follows:

                                      F-24

<PAGE>




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001
<TABLE>
<CAPTION>
      <S>                      <C>
                            (in thousands)
      2002..............       $  4,726
      2003..............          4,829
      2004..............          4,850
      2005..............          4,885
      2006..............          2,995
      Thereafter........          1,414
                               --------
                               $ 23,699
</TABLE>

     Rent  expense  amounted  to  approximately  $2,691,000,   $2,514,000,   and
$3,639,000 for the years ended December 31, 1999, 2000 and 2001, respectively.

     In June 2000, the Company entered into a merchandise licensing agreement to
manufacture  and  distribute  a line of toys  associated  with a motion  picture
trilogy.  The first  motion  picture in the trilogy was released on December 19,
2001 and the  remaining  two are  expected  to be  released  during  the  fourth
quarters  of 2002 and 2003,  respectively.  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 which is outstanding at December 31, 2001.

     The  Company is a party to various  other  royalty  agreements  with future
guaranteed  royalty payments through 2001.  Minimum future obligations under all
royalty agreements are as follows:
<TABLE>
<CAPTION>
     <S>                      <C>
                            (in thousands)
     2002..............       $  5,165
     2003..............          5,235
     2004..............             50
                              --------
                              $ 10,450
</TABLE>

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

Legal Matters

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

     Marvel v.  Simon.  In  December  1999,  Joseph H.  Simon  filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective  December 7, 2001  alleged  transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000,  the Company  commenced an action  against  Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for


                                      F-25
<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001



hire" within the meaning of the applicable  copyright statute and that Simon had
acknowledged  this fact in  connection  with the  settlement  of previous  suits
against the Company's  predecessors  in 1969. The suit seeks a declaration  that
Marvel  Characters,  Inc.,  not Mr. Simon,  is the rightful owner of the Captain
America character.  In February 2002, the Court granted the Company's motion for
summary judgment.  Simon has filed a Notice of Appeal but no date for the appeal
has been scheduled.

     X-Men  Litigation.  In April 2001,  Twentieth  Century Fox Film Corporation
sued Marvel,  Tribune  Entertainment  Co.,  Fireworks  Communications,  Inc. and
Fireworks  Television  (US), Inc. in the United States District Court,  Southern
District of New York,  seeking an injunction  and damages for alleged  breach of
the 1993 X-Men movie license,  unfair  competition,  copyright  infringement and
tortuous  interference  with the  contract  arising from the Mutant X television
show being produced by Tribune and Fireworks under license from Marvel which was

released  in the fall of 2001.  On the same day Fox  filed the  foregoing  suit,
Marvel  commenced an action  against Fox in the same court seeking a declaratory
judgment that the license of the Mutant X title and certain Marvel characters

did not  breach  the  1993  X-Men  movie  license  with  Fox.  Both  suits  were
consolidated.  On August 9, 2001,  in response to Fox's motion for a preliminary
injunction and defendants' motion to dismiss Fox's claims, the Court (i) granted
the motion to dismiss all of Fox's claims  except for its breach of contract and
copyright claims (ii) granted Fox's motion for a preliminary injunction but only
as to the  defendants  use of (a) video clips from the X-Men film and/or trailer
in order to promote the new Mutant X series and (b) a logo that is substantially
similar  to the  logo  used  by Fox in  connection  with  the  X-Men  film.  The
preliminary  injunction  will not have a  significant  effect  on the  Company's
operations.  In January  2002,  the United  States  Appeals Court for the Second
Circuit,  in response to Fox's appeal,  affirmed the District  Court's denial of
Fox's motion for a preliminary  injunction to prevent the airing of the Mutant X
series and  remanded  the case to the  District  Court for  further  proceedings
consistent  with its opinion.  At the present  time,  the parties are engaged in
pre-trial discovery with a trial on the merits scheduled for November 2002.

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

         Administration  Expense  Claims  Litigation.  The Company has initiated
litigation  contesting  the  amount of  certain  Administration  Expense  Claims
submitted to the Company for payment.  As of December 31, 2001,  the Company has
settled substantially all Administrative Expense Claims and believes the accrual
of $3.5 million is sufficient to provide for its remaining obligations.

                                      F-26

<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

14.   Benefits Plans

     The Company has a 401(k) Plan covering  substantially all of its employees.
In addition,  in connection with the sale of Fleer, the Company retained certain
liabilities  related  to a  defined  benefit  pension  plan  for  certain  Fleer
employees.  In prior years,  this plan was amended to freeze the accumulation of
benefits and to prohibit  participation  by new  participants.  The  accumulated
benefit  obligation is approximately  $17.0 million of which  approximately $1.4
million is unfunded at December 31, 2001. This amount is recorded as a component
of  accumulated  other  comprehensive  loss  and is  being  amortized  over  the
remaining lives of the participants.  Plan expenses for the years ended December
31, 1999, 2000 and 2001 were not significant.

15.   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  a  limited  line  of toys to the  worldwide  marketplace.  The
Company's  toy  products  are  based  upon  Spider-Man:  The  Movie  as  well as
properties  that the Company  licenses in from other studios such as the Lord of
the Rings (New Line  Cinema).  The Spectra  Star  division  of Toy Biz  designs,
produces & sells kites in both the mass market stores & specialty hobby shops.

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-27


<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

Licensing Segment

     The  licensing  segment  relates  to the  licensing  of or  joint  ventures
involving the Marvel  Characters  for use with (i)  merchandise  and toys,  (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    Corp    Total
                               -------  ----------  --------- -------- ---------
                                                   (in thousands)
<S>                            <C>      <C>         <C>        <C>      <C>
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....   20,796       --         --       --     20,796

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    Corp    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....   15,038        41          5       --    15,084

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


                                 Toys   Publishing  Licensing    Corp    Total
                               -------- ----------  ---------  ------- --------
                                                      (in thousands)
Year  ended December 31, 2001
Net sales.....................  $91,708   $49,504   $40,012      $ --  $181,224
Gross profit..................   26,932    25,577    40,006        --    92,515
Pre-acquisition litigation
     charge...................       --        --    (3,000)       --    (3,000)
Operating (loss) income.......   (5,807)   14,438     2,508     (9,521)   1,618
EBITDA(1).....................      422    17,618    22,422     (9,521) $30,941

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

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

</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-28

<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

                     16. 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, 2000 and 2001 and for each of the three years ended  December
31, 2001 .
<TABLE>
<CAPTION>

                                                 Issuer
                                                  And        Non-
                                               Guarantors  Guarantors     Total
                                               ----------  ----------   --------
                                                        (in thousands)
<S>                                            <C>         <C>          <C>
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)

For The Year Ended December 31, 2001
Net sales..............................           $157,893   $23,331    $181,224
Gross profit...........................             86,190     6,325      92,515
Operating income.......................                875       743       1,618
Net income ............................              3,872     1,393       5,265
</TABLE>
<TABLE>
<CAPTION>

                                          Issuer
                                          And          Non-      Inter-
                                        Guarantors Guarantors  Company   Total
                                        ---------- ---------- -------- --------
<S>                                     <C>        <C>        <C>      <C>
December 31, 2000
Current assets ......................... $109,870   $ 3,573    $   --   $113,443
Non-current assets......................  439,504    40,347    (39,337)  440,514
                                         --------   --------  --------- --------
Total assets............................ $549,374   $43,920    (39,337) $553,957
                                         =========  ========  ========= ========
Current liabilities.....................  103,233     6,480   (39,337)    70,376
Non-current liabilities.................  250,000        --        --    250,000
8% Preferred Stock......................  202,185        --        --    202,185
Stockholders' equity (deficit)..........   (6,044)   37,440        --     31,396
                                         --------   --------  --------- --------
                                         $549,374   $43,920   ($39,337) $553,957
                                         =========  ========  ========  ========
December 31, 2001
Current assets.......................... $ 98,481   $ 1,746   $    --   $100,227
Non-current assets......................  414,772    41,019    (38,448)  417,343
                                         --------   --------  --------  --------
Total assets............................ $513,253   $42,765   ($38,448) $517,570
                                         =========  ========  ========  ========
Current liabilities.....................  106,097     3,652    (38,448)   71,301

Non-current liabilities.................  196,336        --         --   196,336
8% Preferred Stock......................  207,975        --         --   207,975
Stockholders' equity....................    2,845    39,113         --    41,958
                                         --------   --------  --------  --------
                                         $513,253   $42,765   ($38,448) $517,570
                                         =========  ========  ========  ========
</TABLE>

                                      F-29
<PAGE>




                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

<TABLE>
<CAPTION>

                                                Issuer
                                                and         Non-
                                                Guarantors  Guarantors    Total
                                               ----------- ----------  ---------
                                                       (in thousands
<S>                                            <C>         <C>         <C>
 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
                                               =========== ==========  =========
Year Ended December 31, 2001

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



                                      F-30

<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

                        VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>


                                                   Allowances
                                    Balance       Acquired in      Charged to
                                    At Beginning  MEG Acquisition Sales or Costs   Charges to                  Balance
Description                         of Period     Acquisition      and Expenses  Other Accounts   Deductions   at End
----------------------------        ------------  --------------- -------------- --------------   ----------   -------
                                                               (in thousands)
<S>                                 <C>           <C>             <C>            <C>              <C>          <C>
Year Ended December 31, 1999

Allowances included in Accounts
   Receivable. Net:
Doubtful accounts -- current.........   3,608           --             1,141(3)     --               798       3,951
oubtful 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

Year Ended December 31, 2001

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

(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
(5)  3,693 charged to costs and expenses and (223) charged to sales
</TABLE>


                                      F-31