UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)


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





For
the fiscal year ended December 31, 2007


or





|_|
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ___________________ to ___________________








Commission
file number 1-13638





MARVEL
ENTERTAINMENT, INC.





(Exact
name of registrant as specified in its charter)





Delaware
            
            13-3711775(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)





417
      Fifth Avenue, New York, NY
            
            10016(Address
      of principal executive offices)
            
            (Zip
      Code)





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





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





Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, par value $.01 per share
            
            New
      York Stock ExchangePreferred
      Share Purchase Rights
            
            New
      York Stock Exchange





Securities
registered pursuant to Section 12(g) of the Act:None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes
|X|    No |_|





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes
|_|    No |X|





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes
|X|    No |_|





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  |X|
            Accelerated
      filer  |_|
            Non-Accelerated
      filer  |_|
              (Do
      not check if a smaller reportingcompany)
            Smaller
      reporting company  |_|





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


Yes
|_|    No |X|





The
approximate aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant as of June 30, 2007, the last business
day of the Registrant’s most recently completed second fiscal quarter, was
$1.379 billion based on a price of $25.48 per share, the closing sales price for
the Registrant's common stock as reported in the New York Stock Exchange
Composite Transaction Tape on that date.





As of
February 26, 2008, there were 78,008,242 outstanding shares of the Registrant's
common stock, including 642,006 shares of restricted stock.





DOCUMENTS
INCORPORATED BY REFERENCE


The
information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated
by reference from the Registrant’s definitive proxy statement, which the
Registrant intends to file with the Commission not later than 120 days after the
end of the fiscal year covered by this Report.








TABLE OF CONTENTS




PagePART
      IItem 1
            
            BUSINESS
            1Item 1A
            
            RISK
      FACTORS
            10Item 1B
            
            UNRESOLVED
      STAFF COMMENTS
            13Item 2
            
            PROPERTIES
            14Item 3
            
            LEGAL
      PROCEEDINGS
            14Item 4
            
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            14PART
      IIItem 5
            
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
            14Item 6
            
            SELECTED
      FINANCIAL DATA
            16Item 7
            
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            17Item 7A
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            43Item 8
            
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
            44Item 9
            
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            44Item 9A
            
            CONTROLS
      AND PROCEDURES
            44PART
      IIIItem 10
            
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            45Item 11
            
            EXECUTIVE
      COMPENSATION
            45Item 12
            
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            45Item 13
            
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            45Item 14
            
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            45PART
      IVItem 15
            
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
            46SIGNATURES
            51CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL
      STATEMENT SCHEDULE
            F-1


TOC


ITEM 1. BUSINESS




Unless
the context otherwise requires, the term “we,” “us,” “our,” “Marvel” or “the
Company” each refer to Marvel Entertainment, Inc., a Delaware corporation, and
its subsidiaries.  Some of the characters and properties referred to
in this report are subject to copyright and/or trademark
protection.







General




Marvel
Entertainment, Inc. and its subsidiaries constitute one of the world’s most
prominent character-based entertainment companies, with a proprietary library of
over 5,000 characters.  Our library of characters is one of the oldest
and most recognizable collections of characters in the entertainment industry,
and includes Spider-Man, Iron Man, The Incredible Hulk, Captain America, Thor,
Ghost Rider, The Fantastic Four, X-Men, Blade, Daredevil, The Punisher, Namor
the Submariner, Nick Fury, The Avengers, Silver Surfer and Ant-Man.




Our
growth strategy has been to increase exposure of our characters by licensing
them to third parties for development as movies and television
shows.  The increased exposure can then create revenue opportunities
for us through increased sales of toys and other licensed
merchandise.  Our self-produced movies, the first two of which (Iron Man and The Incredible Hulk) are
scheduled for release in 2008, represent an expansion of that strategy that also
increases our level of control in developing and launching character
brands.  In addition, our self produced movies will offer us an
opportunity to participate in the films’ financial performance to a greater
extent than we could as a licensor.




We
operate in four integrated and complementary operating segments: Licensing,
Publishing, Toys and Film Production.  The expansion of our studio
operations to include feature films that we produce ourselves began in late 2005
with our entering into a $525 million film facility (the “Film Facility”) to
fund the production of our films. This expansion resulted in the creation of a
new segment, the Film Production segment, during 2006.  Previously,
Marvel Studios’ operations related solely to the licensing of our characters to
third-party motion picture and television producers.  Those licensing
activities were included, and are still included, in the Licensing segment. The
operations of developing and producing our own theatrical releases are reported
in our Film Production segment.




We are
party to a joint venture with Sony Pictures Entertainment Inc., called
Spider-Man Merchandising L.P. (the “Joint Venture”), for the purpose of pursuing
licensing opportunities relating to characters based upon movies or television
shows featuring Spider-Man and produced by Sony.  The Joint Venture is
consolidated in our accompanying financial statements as a result of our having
control of all significant decisions relating to the ordinary course of business
of the Joint Venture and our receiving the majority of the financial interest of
the Joint Venture. The operations of the Joint Venture are included in our
Licensing segment.




Licensing




Our
Licensing segment licenses our characters for use in a wide variety of products
and media, the most significant of which are described below.




Consumer
Products




We
license our characters for use in a wide variety of consumer products, including
toys, apparel, interactive games, electronics, homewares, stationery, gifts and
novelties, footwear, food and beverages and collectibles.  Revenues
from these activities are classified in our Licensing segment, other than
revenues from Hasbro, Inc., which are classified in our Toy
segment.




1
 TOC







Studio Licensing




Feature Films.We
have licensed some of our characters to major motion picture studios for use in
motion pictures. For example, we currently have a license with Sony to produce
motion pictures featuring the Spider-Man family of characters.  We
also have outstanding licenses with studios for a number of our other
characters, including The Fantastic Four, X-Men, Daredevil/Elektra, Ghost Rider,
Namor the Submariner and The Punisher.  Under these licenses, we
retain control over merchandising rights and retain more than 50% of
merchandising-based royalty revenue.




Television Programs.We
license our characters for use in television programs.  Several
live-action and animated television shows based on our characters are in various
stages of development including live-action television programming based on Moon
Knight and animated programming based on Iron Man, X-Men and the Incredible
Hulk.




Made-for-DVD Animated Feature
Films. We have licensed some of our characters to an entity controlled by
Lions Gate Entertainment Corp. to produce up to ten feature-length animated
films for distribution directly to the home video market. Releases, to date,
have included Ultimate
Avengers, Ultimate
Avengers 2, The
Invincible Iron
Man and Doctor
Strange.




Destination-Based
Entertainment




We
license our characters for use at theme parks, shopping malls and special
events.  For example, we have licensed some of our characters for use
at Marvel Super Hero Island, part of the Islands of Adventure theme park at
Universal Orlando in Orlando, Florida, and for use in a Spider-Man attraction at
the Universal Studios theme park in Osaka, Japan.  We have also
licensed our characters for the development of a major theme park in
Dubai.




Promotions




We
license our characters for use in short-term promotions of other companies’
products and services.  Recent examples are a license to Proctor and
Gamble for the appearance of Spider-Man on Pampers-brand training pants and swim
pants and a license to Philips Consumer Electronics BV for the appearance of The
Incredible Hulk in a television commercial and in-store advertisements for
Philips television sets.




Publications




Our
Licensing segment licenses our characters to publishers located outside the
United States for use in foreign-language comic books and trade paperbacks and
to publishers worldwide for novelizations and a range of coloring and activity
books.




Publishing




The
Publishing segment creates and publishes comic books and trade paperbacks
principally in North America.  Trade paperbacks are compilations of
previously printed periodicals collected to tell a “complete”
story.  Marvel has been publishing comic books since 1939 and has
developed a roster of more than 5,000 Marvel characters.  Our titles
include Spider-Man, X-Men, Fantastic Four, Iron Man, The Incredible Hulk,
Captain America and Ghost Rider.




2
 TOC







The
Publishing segment's approach to our 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.  Our characters exist in the
“Marvel Universe,” a fictitious universe that provides a unifying historical and
contextual background for the characters and storylines.  The “Marvel
Universe” concept permits us to use the popularity of our characters to more
fully develop existing but lesser-known characters.  In this manner,
formerly lesser-known characters such as Ghost Rider, Black Panther and
Wolverine have been developed and are now popular characters in their own right
and are featured in their own comic books.  The “Marvel Universe”
concept also allows us to use our more popular characters to make “guest
appearances” in the comic books of lesser-known characters to attempt to
increase the circulation of a particular issue or issues.




Customers,
Marketing and Distribution




Our comic
book and trade paperback publications are distributed through three channels:
(i) to comic book specialty stores on a non-returnable basis (the “direct
market”), (ii) to traditional retail outlets, including bookstores and
newsstands, on a returnable basis (the “mass market”) and (iii) on a
subscription sales basis.




In 2007,
the Publishing segment continued to be the comic industry leader, with 40% of
the dollar share and 45% of the unit share of the direct market
channel.  In 2007, approximately 68% of the Publishing segment's net
sales were derived from sales to the direct market.  We distribute our
publications to the direct market through an unaffiliated entity (Diamond Comic
Distributors, Inc.).  We print periodicals to order for the direct
market, thus minimizing the cost of printing and marketing excess
inventory.




For the
years ended December 31, 2007, 2006 and 2005, approximately 17%, 15% and 13%,
respectively, of the Publishing segment’s net sales were derived from sales to
the mass market.




In
addition to revenues from the sale of comic books and trade paperbacks to the
direct market and the mass market, the Publishing segment derives revenues from
sales of advertising and subscriptions and from other publishing activities,
such as custom comics.  For the years ended December 31, 2007, 2006
and 2005, approximately 15%, 15% and 17%, respectively, of the Publishing
segment's net sales were derived from these sources.  In most of our
comic publications, three cover pages and ten interior pages are allocated for
advertising.  We permit advertisers to advertise in a broad range of
our comic book publications or to advertise in specific groups of titles whose
readership’s age is suited to the advertiser.




Our
Marvel Online business has had a small but growing impact on Publishing segment
revenues, mostly through online advertising and comic subscription
sales.  Our website, www.marvel.com, has
also proven to be an effective means to market various Marvel products and
events.   In 2007, we launched a digital comic subscription
service, making over 2,700 previously published Marvel comic books available for
viewing online in a proprietary viewer.  We also completed a major
re-design of our website and added more content including videos, news and
character biographies.   In early 2008, we launched a separate
website, www.marvelkids.com,
featuring Marvel characters and content for children ages 6-11.  We
expect strong growth and diversification in Marvel Online revenues as we
continue to increase our online presence.




Toys




In
January 2006, we entered into a license agreement with Hasbro, Inc. under which
Hasbro has the exclusive right to make action figures, plush toys and role-play
toys, and the non-exclusive right to make several other types of toys, featuring
our characters.  The license gives Hasbro the right to sell those toys
at retail from January 1, 2007 through December 31, 2011.  In some
cases, however, Hasbro was permitted to sell toys at retail at the end of
2006.  The license is subject to extension in the event that
entertainment productions featuring our characters are not released according to
an agreed-upon schedule.  We also entered into a services agreement
with Hasbro under which we have agreed to provide brand expertise, marketing
support and other services in connection with the licensed toys.  In
2006, royalty and service fee income recognized from Hasbro aggregated $5.2
million.  Most of the Toy segment’s 2006 sales, however, came from
toys that we produced and sold ourselves.




3
 TOC







During
2007, our Toy segment’s sales consisted primarily of royalties and service fees
from Hasbro, which aggregated $70.9 million.  The Toy segment also
generates revenue from sales of licensed-in properties such as Curious
George.




Film
Production




Our Film
Production segment develops, produces and distributes films that are primarily
financed with our $525 million film facility and our Iron Man and Hulk
facilities, all of which are described below.  The first two films
under production by the Film Production segment, Iron Man and The Incredible Hulk, are
scheduled for release in May and June 2008, respectively.




The cast
of Iron Man includes
Robert Downey, Jr. as Tony Stark (a.k.a. Iron Man), Gwyneth Paltrow as Virginia
“Pepper” Potts, Terrence Howard as Jim “Rhodey” Rhodes and Jeff Bridges as
Obadiah Stane.  All four actors have received or been nominated for
Academy Awards for their past work.  Jon Favreau is the
director.  The cast of The Incredible Hulk includes
Edward Norton as Bruce Banner (a.k.a. The Incredible Hulk), Liv Tyler as Betty
Ross, William Hurt as General Thaddeus “Thunderbolt” Ross and Tim Roth as Emil
Blonsky (a.k.a. Abomination).  The Incredible Hulk is being
directed by Louis Leterrier.  Three of these four actors have received
or been nominated for Academy Awards for their past work.




The film
facility enables us to independently finance the development and production of
up to ten feature films, including films that may feature the following Marvel
characters, whose theatrical film rights are pledged as collateral to secure the
film facility:




·
            Ant-Man


·
            Black
      Panther


·
            Captain
      America


·
            Cloak
      & Dagger


·
            Doctor
      Strange


·
            Hawkeye


·
            Iron
      Man


·
            Nick
      Fury


·
            Power
      Pack


·
            Shang-Chi


·
            The
      Avengers


·
            The
      Incredible Hulk





Also
included as collateral for the film facility are the theatrical film rights to
many of the supporting characters that would be most closely associated with the
featured characters and character families. For example, the theatrical film
rights to The Incredible Hulk’s girlfriend, Betty Ross, and his nemesis,
Abomination, are both pledged as collateral to the film facility.




We fund,
from working capital and other sources, the incremental overhead expenses and
costs of developing each film to the stage at which the conditions for an
initial borrowing for the film are met under the film facility.  If
the film’s initial funding conditions are met, we are able to borrow under the
film facility an amount equal to the incremental overhead expenses incurred by
us related to that film in an amount not exceeding 2% of the budget for that
film under the film facility, plus development costs. If the initial funding
conditions are not met, we will be unable to borrow these amounts under the film
facility.  In February 2007 and June 2007, Iron Man and The Incredible Hulk,
respectively, met their initial funding conditions and funding of these
productions began.




While
theatrical films featuring the characters listed above may be financed and
produced by us only through the film facility, we retain all other rights
associated with those characters. In addition, we may continue to license our
other characters for movie productions by third parties, obtain financing to
produce movies based on those other characters ourselves or with others or, with
the consent of the film facility lenders, finance and produce films based on
those other characters through the film facility.




4
 TOC




In
connection with the film facility, we formed the following wholly-owned
subsidiaries: MVL Rights LLC, MVL Productions LLC, Incredible Productions LLC,
Iron Works Productions LLC, MVL Iron Works Productions Canada, Inc., MVL
Incredible Productions Canada, Inc. and MVL Film Finance LLC (collectively, the
“Film Slate Subsidiaries”). The assets of the Film Slate Subsidiaries, other
than MVL Productions LLC, are not available to satisfy debts or other
obligations of any of our other subsidiaries or any other persons.




Terms of the Film
Facility




Financing
Available; Rate of Interest; Borrowings Outstanding




The film
facility expires on September 1, 2016, or sooner if the films produced under the
facility fail to meet certain defined performance measures.  The film
facility consists of $465 million in revolving senior bank debt and $60 million
in mezzanine debt, which is subordinated to the senior bank
debt.  Both Standard & Poor’s, a division of the McGraw-Hill
Companies, Inc., and Moody’s Investor Rating Service, Inc. have given the senior
bank debt an investment grade rating.  In addition, Ambac Assurance
Corporation has insured repayment of the senior bank debt, raising its rating to
AAA.  In exchange for the repayment insurance, we pay Ambac a fee
calculated as a percentage of senior bank debt.  The interest rates
for outstanding senior bank debt, and the fees payable on unused senior bank
debt capacity, both described below, include the percentage fee owed to
Ambac.




The
interest rate for outstanding senior bank debt is LIBOR or the commercial paper
rate, as applicable, plus 1.635% in either case.  The film facility
also requires us to pay a fee on any senior bank debt capacity that we are not
using.  This fee is 0.60%, and is applied on $465 million reduced by
the amount of any outstanding senior bank debt.




If
Ambac’s rating by either S&P or Moody’s falls below AAA, the interest rate
for outstanding senior bank debt would increase by 1.30% and the fee payable on
any unused senior bank debt capacity would increase by 0.30%.  If the
senior bank debt’s rating (without giving effect to Ambac’s insurance) by either
S&P or Moody’s falls below investment grade, the interest rate for the
outstanding senior bank debt could increase by up to an additional
0.815%.  In addition, if we become more leveraged, the interest rate
for outstanding senior bank debt could increase by up to an additional
0.50%.




The
interest rate for the mezzanine debt is LIBOR plus 7.0%.  The
mezzanine debt was drawn on first and will remain outstanding for the life of
the film facility.




As of
December 31, 2007, MVL Film Finance LLC had $246.9 million in total outstanding
borrowings through the film facility.  In 2005, we incurred
transaction costs of $21.3 million related to the creation of the film facility
and we paid $3.2 million for an interest rate cap that effectively limits LIBOR
to 6.0% when computing our interest rate for outstanding debt, up to certain
varying amounts, under the film facility.  Our first borrowings under
the film facility were used to fund the transaction costs and the interest rate
cap.  Later borrowings have been used to fund the production, still in
process, of Iron Manand The Incredible
Hulk.  Additional borrowings under the film facility are used
to fund the facility’s interest costs.




Limitations on Recourse under Film Facility




The
borrowings under the film facility are non-recourse to us and our affiliates,
other than MVL Film Finance LLC.  In other words, only MVL Film
Finance LLC, and not its parent companies, will be responsible for paying back
amounts borrowed under the film facility.  MVL Film Finance LLC has
pledged, as collateral for the borrowings, the theatrical film rights to the
characters included in the film facility.  While the borrowings are
non-recourse to us, we have agreed to instruct our subsidiaries involved in the
film facility to maintain operational covenants.  If those covenants
are not maintained, we may be liable for any actual damages caused by the
failure, although our liability would be subject to limitations, including the
exclusion of consequential damages.




5
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Use
of Funds




Funds
under the film facility will be used for the production of up to ten films
featuring characters included in the film facility.  Funds may be used
to produce more than one film based on a single character or character family,
so even if ten films are produced using the funds from the film facility, not
all characters and character families included in the facility will necessarily
be the subject of a film financed under the facility.




Initial
Funding Conditions




For any
film included in the film facility, an initial funding may be made only if
certain conditions are met.  The conditions include obtaining a
satisfactory completion bond, production insurance and distribution for the
film, and compliance with representations, warranties and
covenants.  The distribution requirements, described in detail below,
require us to pre-sell the distribution rights to each film in Australia and New
Zealand, Japan, Germany, France and Spain (the “Reserved Territories”) and to
obtain an agreement with a major studio to distribute the film in all other
territories.  The proceeds from the Reserved Territory pre-sales will
be used to fund the film in development.  To obtain a completion bond,
we will need to have in place the main operational pieces to producing a film,
including approved production, cash flow and delivery schedules, an approved
budget, an approved screenplay and the key members of the production crew,
including the director and producer.




In
February 2007 and June 2007, Iron Man and The Incredible Hulk,
respectively, met their initial funding conditions and funding of these
productions began.




Additional
Initial Funding Conditions for Fifth Film and each Film Thereafter




There are
additional conditions to the initial funding for the fifth film and for each
film thereafter, including (i) a minimum ratio of the assets of MVL Film Finance
LLC to its liabilities and (ii) a minimum percentage of the aggregate production
budgets for each film covered by pre-sale of the distribution rights to the
Reserved Territories, the proceeds of any government rebate, subsidy or tax
incentive program and any other source of co-financing.  In the event
either of these conditions are not satisfied after the funding of our first four
films, funding for the fifth and all remaining productions may not be funded
under the film facility.




Unrestricted
Proceeds of the Film Facility




In
connection with each film released under the film facility, we are entitled to
retain a producer fee of five percent of any gross receipts and of any amounts
received in connection with the sale of the Reserved Territories or other
co-financing sources.  We will also retain, after the payment of
miscellaneous third party agency fees and participations, all film-related
merchandising revenues, such as revenues from toy sales and product licensing
based on the movies. These merchandising revenues and the producer fee are
neither pledged as collateral nor subject to cash restrictions under the film
facility.




Restricted Proceeds of the Film Facility




MVL Film
Finance LLC will receive and retain funds from revenue streams such as our share
of box office receipts, DVD/VHS sales and television.  Any sums
remaining after payments of residuals and participations to talent, distribution
fees and expenses (including marketing costs), interest expense and production
costs will be placed into a blocked account maintained by MVL Film Finance
LLC.  Sums in that account may be used only for the production of
films and repayment of indebtedness under the film facility.  After
the release of the third film, funds may be withdrawn from the blocked account
for our general corporate purposes if we have met conditions including
compliance with financial coverage tests and a minimum balance
requirement.  After three films, funds may be withdrawn for our
general purpose only if the balance in the blocked account is at least $350
million.  For each film thereafter until film nine, the balance
requirement is reduced by $50 million.




6
 TOC




Ability
to Refinance or Discontinue Film Facility




The film
facility allows MVL Film Finance LLC to either refinance or simply discontinue
the financing at any time without penalty by prepaying all outstanding
indebtedness.




Development
and Distribution of the Films Financed through the Film Facility




As a film
development company, MVL Productions LLC, a wholly-owned consolidated subsidiary
of ours, engages in a broad range of pre-production services.  Those
services include developing film concepts and screenplays, preparing budgets and
production schedules, obtaining production insurance and completion bonds and
forming special-purpose, bankruptcy-remote subsidiaries to produce each film as
a work-made-for-hire for MVL Film Finance LLC.  MVL Productions LLC
has also entered into studio distribution agreements with Paramount Pictures
Corporation and Universal Pictures, a division of Universal City Studios,
LLLP.




Distribution:
Worldwide Excluding Reserved Territories




MVL
Productions LLC’s studio distribution agreement with Paramount requires
Paramount, at the request of MVL Productions LLC, to distribute up to ten films
financed and produced under the film facility.  Paramount is required
to release each film during one of two prime release periods each year: the
Spring/Summer and Fall/Holiday seasons.  Under the studio distribution
agreement, Paramount has guaranteed MVL Productions LLC wide distribution
outside of the Reserved Territories with commensurate advertising and marketing
efforts for each film.  Included in Paramount’s distribution rights
are exclusive theatrical and non-theatrical (e.g., exhibition on airplanes,
schools and military installations), home video, pay television and
international television distribution rights.  Excluded are all
distribution rights with respect to the Reserved Territories and free television
distribution in the United States.  As compensation for its services
under the studio distribution agreement, after remitting to us 5% of the film’s
gross receipts, Paramount is permitted to recoup its distribution costs and
expenses (including print and advertising costs and payments of residuals and
participation costs owed to talent) for each film from the gross receipts of
each film and to receive its distribution fee before we receive our share of
gross receipts.




Universal
Studios has agreed to distribute Marvel’s film The Incredible Hulk and
sequels on essentially the same terms as those on which Paramount has agreed to
distribute the other films financed and produced under the film
facility.




Distribution:
Reserved Territories




MVL
Productions LLC is required to pre-sell the distribution rights for each film in
the Reserved Territories.  The proceeds of these pre-sale arrangements
will provide a source of funding for the direct costs of the films in addition
to the film facility. Obtaining a cumulative, minimum target budget percentage
from such pre-sales, the proceeds of any government rebate, subsidy or tax
incentive program and any other source of co-financing is a condition to the
initial funding for the fifth film and for each film thereafter.




Iron Man
Facility




On
February 27, 2007, we closed a $32.0 million financing with Comerica Bank (the
“Iron Man Facility”) through our wholly-owned consolidated subsidiary, Iron
Works Productions LLC.  The proceeds of this financing may only be
used to fund the production of our Iron Man feature film. 
Borrowings under this facility are non-recourse to us and our affiliates other
than with respect to the collateral pledged to this facility, which consists of
various affiliated film companies’ rights to distribute the Iron Man film in the Reserved
Territories and the contracts that MVL Productions LLC has entered into with
third-party distributors to distribute Iron Man in the Reserved
Territories.  This facility, which expires on July 25, 2008 or sooner if an
event of default occurs, consists of $32.0 million in bank debt but contains a
$2.5 million interest reserve that will prevent us from borrowing the full
amount.  The rate for borrowings under this facility is the bank’s
prime rate or LIBOR (4.70% at December 31, 2007) plus 1%, at our election. 
The facility contains customary event-of-default provisions and covenants
regarding our film-related affiliates, the production of the Iron Man movie and our
ownership of the intellectual property underlying the Iron Man movie.  As
of December 31, 2007, the Iron Man Facility had $25.5 million in outstanding
borrowings.




7
 TOC




Hulk
Facility




On June
29, 2007, we closed a $32.0 million financing with HSBC Bank USA, National
Association (the “Hulk Facility”) through our wholly-owned consolidated
subsidiary, Incredible Productions LLC.  The proceeds of this
financing may only be used to fund the production of our The Incredible Hulk feature
film.  Borrowings under this facility are non-recourse to us and our
affiliates other than with respect to the collateral pledged to this facility,
which consists of various affiliated film companies’ rights to distribute The Incredible Hulkfilm in
the Reserved Territories and the contracts that MVL Productions LLC has entered
into with third-party distributors to distribute The Incredible Hulkin the
Reserved Territories.  This facility, which expires on September 30, 2008
or sooner if an event of default occurs, consists of $32.0 million in bank debt
but contains a $2.3 million interest reserve that will prevent us from borrowing
the full amount.  The rate for borrowings under this facility is the bank’s
prime rate or LIBOR plus 1%, at our election.  The facility contains
customary event-of-default provisions and covenants regarding our film-related
affiliates, the production of The Incredible Hulk movie and
our ownership of the intellectual property underlying The Incredible Hulk
movie.  As of December 31, 2007, the Hulk Facility had $16.8 million in
outstanding borrowings.




For
further information about our segments, see Note 12 to our accompanying
consolidated financial statements.




Intellectual
Property




Our most
valuable assets are our library of proprietary characters, the stories we have
published for decades, the associated copyrights, trademarks and goodwill and
our “Marvel” and “Marvel Comics” trade names.  We believe that our
library of characters and stories could not easily be replicated. We conduct an
active program of maintaining and protecting our intellectual property rights in
the United States and abroad.  Our principal trademarks have been
registered in the United States and in certain of the countries in Western
Europe, Latin America, Asia (including many Pacific Rim countries), the Middle
East and Africa.  While we have registered numerous trademarks in
these countries, and expect that our rights will be protected there, certain
countries do not have laws that protect United States holders of intellectual
property as strongly as laws in the United States, and what rights we have in
those countries can be difficult to enforce.  There can be no
assurance that our rights will not be violated or our characters
“pirated.”




Competition




The
industries in which we compete are highly competitive.




The
Licensing segment competes with a diverse range of entities that own
intellectual property rights in characters. These include DC Comics (a
subsidiary of Time Warner, Inc.), The Walt Disney Company, NBC Universal, Inc.
(a subsidiary of General Electric Company), DreamWorks Animation SKG, Inc. and
other entertainment-related entities. Many of these competitors have greater
financial and other resources than we do.




The
Publishing segment competes with numerous publishers in the United
States.  Some of the Publishing segment's competitors, such as DC
Comics, are part of integrated entertainment companies and have greater
financial and other resources than we do.  The Publishing segment also
faces competition from other entertainment media, such as movies and
television.




In its
capacity as a licensor to Hasbro, the Toy segment faces competition similar to
that of the Licensing segment.  In its capacity as a producer and
seller of toys, the Toy segment competes with many larger toy companies in the
design and development of new toys, in the procurement of licenses and for
adequate retail shelf space for its products.




8
 TOC




The Film
Production segment competes with other film producers, including major studios
such as Twentieth Century Fox and Sony Pictures (which also produce films
licensed by our Licensing segment). Many of these producers are part of
integrated entertainment companies and have greater financial and other
resources than we do. Paramount and Universal, who have agreed to distribute the
Film Production segment’s films, are also competitors of the Film Production
segment in their capacity as film producers.




Employees




As of
December 31, 2007, Marvel employed approximately 250 people.  We also
contract for creative work on an as-needed basis with over 500 active freelance
writers and artists.  Our employees are not subject to any collective
bargaining agreements.  Management believes that Marvel’s relationship
with its employees is good.




Financial
Information about Geographic Areas




The
following table sets forthrevenues from external
customers by geographic area:







Revenue
      by Geographic Area(in
      millions)2007
            
            
            2006
            
            
            2005U.S.
            
            
            Foreign
            
            
            U.S.
            
            
            Foreign
            
            
            U.S.
            
            
            ForeignLicensing*
            $
            178.5
            
            $
            94.2
            
            $
            83.9
            
            $
            43.3
            
            $
            182.0
            
            $
            48.1Publishing
            
            106.9
            
            
            18.8
            
            
            90.9
            
            
            17.6
            
            
            77.3
            
            
            15.1Toys**
            
            53.1
            
            
            34.3
            
            
            82.2
            
            
            33.9
            
            
            47.7
            
            
            20.3Total
            $
            338.5
            
            $
            147.3
            
            $
            257.0
            
            $
            94.8
            
            $
            307.0
            
            $
            83.5





*Includes
U.S. revenue derived from the Joint Venture of $70.8 million, $3.4 million and
$13.1 million for 2007, 2006, and 2005, respectively.  Includes
foreign revenue derived from the Joint Venture of $51.2 million, $0.7 million
and $11.6 million for 2007, 2006, and 2005, respectively.




**$38.5
million and $4.4 million of U.S. toy revenues and $32.4 million and $0.8 million
of foreign toy revenues for 2007 and 2006, respectively, are attributable to
royalties and service fees generated from our licensee, Hasbro.  In
2005, $37.1 million of U.S. toy revenue and $14.7 million of foreign toy revenue
is attributable to royalties and service fees generated by our licensee, Toy Biz
Worldwide, Ltd. (“TBW”).




Government
Regulations




Our toy
operations are subject to laws such as the Federal Hazardous Substances Act and
the Federal Consumer Product Safety Act.  Those laws empower the
Consumer Product Safety Commission (the “CPSC”) to protect children from
hazardous toys and other articles.  The CPSC has the authority to
exclude from the market articles that are found to be
hazardous.  Similar laws exist in some states and cities in the United
States and in other countries throughout the world.  For products that
we produce and sell, we maintain 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.




9
 TOC




Available
Information




Our
Internet address is www.marvel.com.  Through
our website, we make available, free of charge, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports, as soon as reasonably practicable after we electronically file
them with, or furnish them to, the Securities and Exchange
Commission.  We also make available on our website our Code of
Business Conduct and Ethics, our Code of Ethics for the Chief Executive Officer
and Senior Financial Officers, our Corporate Governance Guidelines and the
charters of the following committees of our Board of Directors: the Audit
Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee.  We are providing our Internet address here
solely for the information of investors.  We do not intend to
incorporate the contents of the website into this report.  Printed
copies of the information referred to in this paragraph are also available on
written request sent to: Corporate Secretary, Marvel Entertainment, Inc., 417
Fifth Avenue, New York, New York 10016.




Certification
with the New York Stock Exchange




On June
4, 2007, our chief executive officer filed, with the New York Stock Exchange,
the CEO certification regarding our compliance with the exchange’s corporate
governance listing standards as required by Listed Company Manual Rule
303A.12.




ITEM 1A. RISK
FACTORS




Forward-Looking
Statements




The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements that Marvel or its representatives
make.  Statements that are not statements of historical fact,
including comments about our business strategies and objectives, growth
prospects and future financial performance, are forward-looking
statements.  The words “believe,” “expect,” “intend,” “estimate,”
“anticipate,” “guidance,” “forecast,” “plan,” “outlook” and similar expressions,
in filings with the SEC, in our press releases and in oral statements made by
our representatives, also identify forward-looking statements.  The
forward-looking statements in this report speak only as of the date of this
report.  We do not intend to update or revise any forward-looking
statements to reflect events or circumstances after the date on which the
statements are made, even if new information becomes available.




The risk
factors listed below, among others, could cause our actual results to differ
significantly from what is expressed in our forward-looking
statements.




Risk
Factors




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




Financial difficulties of
licensees.  We have licensed to other parties the exclusive
right to manufacture and sell various character families in important
merchandise categories such as footwear, costumes and interactive
games.  Our revenues could be adversely affected if those licensees or
any of our other significant non-exclusive licensees, many of whom have
significant future payment obligations to us, experience financial difficulties
or bankruptcy.




10
 TOC




Changing consumer
preferences.  Our products (and those of our licensees) are
subject to changing consumer preferences.  In particular, products
based on feature films are, in general, successfully marketed for only a limited
period of time following the film's release.  Existing product lines
might not retain their current popularity or new products developed by us or our
licensees might not meet with the same success as current
products.  Our licensees and we might not accurately anticipate future
trends or be able to successfully develop, produce and market products to take
advantage of market opportunities presented by those trends. Part of our
strategy (and the strategy of many of our licensees) is to make products based
on the anticipated success of feature film releases and TV
broadcasts.  If these releases and broadcasts are not successful,
these products may not be sold profitably or even at all.  Demand for
our toys could decrease as a result of safety-based recalls such as the one we
issued in November 2007 for some of our Curious George toys.  In
addition, demand for Marvel-branded merchandise could decrease in the event of
safety problems in products produced and sold by our licensees.




Movie- and television-production
delays and cancellations. We do not control the
decision to proceed with the production of films and television programs based
on characters that we license to studios, and we do not control the timing of
the releases of those films and programs.  Delays or cancellations of
proposed films and television programs could have an adverse effect on our
business.  Dates we express for the anticipated release of films and
launch dates for television programs are anticipated dates only and those events
could be delayed or, in some instances, even cancelled.




Concentration of Toy Business in One
Licensee.  Most of our toy revenue is now generated under a
license with Hasbro.  Disruption to our relationship with Hasbro or
financial difficulties of Hasbro could adversely affect our
revenues.  In addition, the retail toy business is highly
concentrated, and an adverse change in the relationship between Hasbro and one
or more of its major customers could have a material adverse effect on
us.  The bankruptcy or other lack of success of one or more
significant toy retailers could materially decrease our earnings under the
Hasbro license.




Uncertainties to do with our entry
into the film production business.We have only recently
entered into the film-production business, with the closing in September 2005 of
a $525 million financing for a slate of films to be produced by our Film
Production segment.  Though we have acted as a co-producer and worked
alongside film studios that have licensed our characters, we have never produced
films by ourselves before and we will not necessarily be
successful.  In addition, we have to make significant up-front
investments in film development costs and will not be able to borrow those
amounts from the film facility if for some reason the film in development does
not meet the lenders’ conditions for funding.  If the lenders’
conditions are met, repayment of their loan will depend on the films’ financial
success.  Should proceeds from the films be insufficient to repay the
loan, we could lose the film rights to some important Marvel
characters.  In addition, our consolidated statements of net income
(also known as our “income statement” or “profit and loss statement”) will
reflect any losses suffered by the film facility even if we do not have to fund
those losses, and as a result, the volatility of our consolidated financial
results could increase.  Among the factors that might cause the
developments described above, or other material adverse developments, are the
following:




·
            We might be unable to attract
      and retain creative talent.The success of
      the film facility depends to a degree on our ability to hire, retain and
      motivate top creative talent. Making movies is an activity that requires
      the services of individuals, such as actors, directors and producers, who
      have unusual creative talents. Individuals with those talents may be more
      difficult to identify, hire and retain than are individuals with general
      business management skills. We have to hire and retain creative talent to
      assist us in making our movies. If we experience difficulty in hiring,
      retaining or motivating creative talent, the production of our films could
      be delayed or the success of our films could be adversely
      affected.




11
 TOC




·
            Our films might be less
      successful economically than we anticipate.We cannot predict the
      economic success of any of our films because the revenue derived from the
      distribution of a film depends primarily upon its acceptance by the
      public, which cannot be accurately predicted. The economic success of a
      film also depends upon the public’s acceptance of competing films,
      critical reviews, the availability of alternative forms of entertainment
      and leisure time activities, piracy and unauthorized recording,
      transmission and distribution of films, general economic conditions,
      weather conditions and other tangible and intangible factors, none of
      which can be predicted with certainty.  We expect to release a
      limited number of films per year as part of the film facility. The
      commercial failure of just one of those films could have a material
      adverse effect on our results of operations in both the year of release
      and in the future.




·
            Our films might be more
      expensive to make than we anticipate.  We expect that the
      financing will provide the capital required to produce the film
      facility.  Expenses associated with producing the films could
      increase beyond the financing’s limit, however, because of a range of
      things such as an escalation in compensation rates of talent and crews
      working on the films or in the number of personnel required to work on
      films, or because of creative problems or difficulties with technology,
      special effects and equipment.  In addition, unexpected
      circumstances sometimes cause film productions to exceed
      budget.




·
            Our film productions might be
      disrupted or delayed.Our movies productions are subject
      to long and inflexible schedules.  Disruptions or delays to
      those schedules, by a union strike (such as the one currently threatened
      by the Screen Actors Guild for the summer of 2008) or by any other event,
      could cause us to incur additional costs, miss an anticipated release
      date, go for long periods without releasing a movie or all of the above,
      and could hurt our associated licensing and toy
  programs.




·
            We might be disadvantaged by
      changes or disruptions in the way films are
      distributed.  The manner in which consumers access film
      content has undergone rapid and dramatic changes. Some ancillary means of
      distribution, such as the DVD market, have gained importance, while others
      have faded.  We cannot assure that new distribution channels
      will be as profitable for the film industry as are today’s channels or
      that we will successfully exploit any new channels. We can also not assure
      that current distribution channels, such as the DVD market, will maintain
      their profitability. In addition, films and related products are
      distributed internationally and are subject to risks inherent in
      international trade including war and acts of terrorism, instability of
      foreign governments or economies, fluctuating foreign exchange rates and
      changes in laws and policies affecting the trade of movies and related
      products.




·
            We might lose potential sales
      because of piracy of films and related products. With technological
      advances, the piracy of films and related products has increased.
      Unauthorized and pirated copies of our films will reduce the revenue
      generated by those films and related
products.




·
            We will be primarily dependent
      on a single distributor for each film.If our studio distributor
      (Paramount or, in the case of The Incredible Hulk and
      its sequels, Universal) were to fail to perform under its distribution
      agreement or if it were to experience financial difficulties, our ability
      to distribute our films and to receive proceeds from our films could be
      impaired.




12
 TOC




·
            We will depend on our studio
      distributors for the implementation of internal controls related to the
      accounting of film-production activities. Because of Paramount’s
      and Universal’s role as distributor and paymaster of the film facility
      films, we will depend on them to have internal controls over financial
      reporting related to the films they distribute and to provide us with
      information related to those internal controls.  Paramount’s and
      Universal’s internal controls might not be sufficient to allow us to meet
      our internal control obligations, to allow our management to properly
      assess those controls or to allow our independent registered public
      accounting firm to attest to our management’s
      assessment.  Paramount or Universal might fail to cure any
      internal control deficiencies related to the films that they distribute
      for us.  We may be unable to effectively create compensating
      controls to detect and prevent errors or irregularities in Paramount’s and
      Universal’s accounting to us and
others.




·
            We might fail to meet the
      conditions set by the lenders for the funding of films. An initial
      funding of films in the film facility will be made only if the lenders’
      conditions are met.  Those conditions include our obtaining a
      completion bond and production insurance, and our arranging for
      distribution in the territories not served by our studio
      distributor.  To obtain a completion bond we will need to have
      in place the main operational pieces to producing a film, including
      approved schedules for production, cash flow and delivery, an approved
      budget, an approved screenplay and the key members of the production crew,
      including the director and producer.  We might not be able to
      satisfy those conditions and obtain a completion bond.  In
      addition, there are very few companies that provide completion bonds in
      the amounts that we will require, and if the one company with which we
      have so far made arrangements were to exit the business, we might be
      unable to obtain a completion bond under any circumstances.  If
      the lenders’ conditions are not met, the film in question will not be
      funded and we will be forced to absorb the up-front film development
      costs, which could be material, by using our own
  funds.




·
            We might fail to meet the
      tests imposed by the lenders for the funding of films beyond the first
      four.In order for more than four films to be funded,
      the film facility will have to pass an interim asset test and a
      co-financing test.  We intend to satisfy the co-financing test
      mostly with foreign pre-sales proceeds and foreign tax credits, but if
      those proceeds and credits are not sufficient, then we may have to find
      other sources of funding, which might not be available on attractive
      terms.  If those tests are not passed, the film facility may be
      cut short and, because fewer films will be available to repay the lenders,
      our risk of losing film rights to some of our characters will
      increase.




·
            Accounting related to the
      production of our films may result in significant fluctuations in our
      reported income or loss. Accounting rules require that our
      consolidated statements of net income reflect profits and losses of
      the film facility, even if we do not have to fund those losses
      ourselves.  The result may be significant fluctuations, and
      increasing volatility, in our reported financial
  results.




ITEM
1B. UNRESOLVED
STAFF COMMENTS




Not applicable.




13
 TOC




ITEM 2. PROPERTIES




Marvel
has the following principal properties:







Facility
            Location
            Square
      Feet
            Owned/LeasedOffice
      (1)
            New
      York, New York
            65,253
            
            LeasedOffice
      (2)
            Beverly
      Hills, California
            18,418
            
            LeasedOffice
      (3)
            London,
      England
            1,700
            
            Leased(1)Used
      by our Publishing and Toys segments.
              (2)Used
      by our Licensing and Film Production segments.
              (3)Used
      by our Licensing segment.
              Our
      Licensing segment also leases office space in West Palm Beach,
      Florida.




ITEM 3.  LEGAL
PROCEEDINGS




The
information required by Part I, Item 3 is incorporated herein by reference to
the information appearing under the caption “Commitments and Contingencies” in
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations, in Part II hereof.  The caption can be found on page
42, below.






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




During
the fourth quarter of 2007, no matters were submitted to a vote of Marvel’s
security holders.









PART II




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




Market
Price of and Dividends on our Common Stock




The
principal United States market in which our common stock is traded is the New
York Stock Exchange.  Our common stock is not listed for trading on
any other securities exchange registered under the Securities Exchange Act of
1934.  The following table sets forth, for each fiscal quarter
indicated, the high and low closing prices for our common stock as reported in
the New York Stock Exchange Composite Transaction Tape.







Fiscal
      Year
            High
            Low2006First
      Quarter
            $20.12
            $15.96Second
      Quarter
            $20.80
            $18.84Third
      Quarter
            $24.44
            $17.40Fourth
      Quarter
            $29.23
            $24.372007First
      Quarter
            $30.91
            $26.44Second
      Quarter
            $30.00
            $25.48Third
      Quarter
            $26.81
            $22.03Fourth
      Quarter
            $29.08
            $22.75





As of
February 26, 2008, the number of holders of record of our common stock was
3,646.




We have
not declared any dividends on our common stock.




14
 TOC




Performance
Graph




The following graph compares the
cumulative total stockholder return on shares of our common stock with that of
(i) the New York Stock Exchange Composite Index and (ii) the Amex Media
(Communications) Index.




The comparison assumes that,
immediately after the close of business on December 31, 2002, $100 was invested
in shares of our common stock and in the stocks included in the NYSE Composite
Index and the Amex Media (Communications) Index, and that all dividends were
reinvested. These indexes, which reflect formulas for dividend reinvestment and
weighting of individual stocks, do not necessarily reflect returns that could be
achieved by individual investors.







Value
of $100 Invested Over Period Presented:





12/31/02
            12/31/03
            12/31/04
            12/31/05
            12/31/06
            12/31/07Marvel
      Entertainment, Inc.
            $100.00
            $324.16
            $342.09
            $273.61
            $449.50
            $446.16NYSE
      Composite
            $100.00
            $131.73
            $151.45
            $165.62
            $199.52
            $217.21AMEX
      Media (Communications)
            $100.00
            $171.66
            $117.72
            $118.97
            $115.02
            $120.85





15
 TOC








ITEM 6. SELECTED FINANCIAL
DATA




The
following table presents selected consolidated financial data, derived from our
audited financial statements, for the five-year period ended December 31,
2007.  Marvel has not declared dividends on its common stock during
any of the periods presented below.







Year
      Ended December 31,2007
            
            2006
            
            2005
            
            2004
            
            2003(in
      thousands, except per share amounts)Statements
      of Net Income Data:Net
      sales
            
            $
            485,807
            
            $
            351,798
            
            $
            390,507
            
            $
            513,468
            
            $
            347,626Operating
      income
            
            
            274,429
            
            
            112,560
            
            
            171,167
            
            
            224,413
            
            
            167,222Income
      before income tax expense and minority interest
            
            
            263,232
            
            
            98,800
            
            
            171,048
            
            
            206,872
            
            
            150,372Income
      from continuing operations
            
            
            139,823
            
            
            58,704
            
            
            102,819
            
            
            124,877
            
            
            151,648Income
      from continuing operations per common share
            
            
            1.75
            
            
            0.71
            
            
            1.03
            
            
            1.17
            
            
            1.50Net
      income
            
            
            139,823
            
            
            58,704
            
            
            102,819
            
            
            124,877
            
            
            151,648Diluted
      net income per common share (1)
            
            
            1.70
            
            
            0.67
            
            
            0.97
            
            
            1.10
            
            
            1.34Preferred
      dividends
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            1,163











December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(in
      thousands)Balance
      sheet data:Working
      capital (deficit)
            
            $
            (108,483
            )
            $
            (58,559
            )
            $
            2,532
            
            $
            142,231
            
            $
            214,198Total
      assets
            
            
            817,358
            
            
            623,865
            
            
            573,546
            
            
            714,814
            
            
            741,857Borrowings
            
            
            246,862
            
            
            50,200
            
            
            25,800
            
            
            –
            
            
            –Other
      non-current debt
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            150,962Stockholders’
      equity
            
            
            181,503
            
            
            254,891
            
            
            360,600
            
            
            546,500
            
            
            469,450Treasury
      stock
            
            
            894,940
            
            
            682,886
            
            
            395,536
            
            
            91,001
            
            
            32,955





(1)The
      net income used to calculate diluted net income per common share is net of
      preferred dividends in 2003.




16
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





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




Set forth
below is a discussion of our financial condition and our results of operations
for the three fiscal years in the period ended December 31, 2007.




Overview




Management
Overview of Business Trends




We
operate in four integrated and complementary operating segments: Licensing,
Publishing, Toys and Film Production.  The expansion of our studio
operations to include feature films that we produce ourselves began in late 2005
with our entering into a $525 million film facility to fund the production of
our films.  This expansion has resulted in the creation of our Film
Production segment, which we began to present separately in the fourth quarter
of 2006.  Previously, Marvel Studios’ operations related solely to the
licensing of our characters to third-party motion picture and television
producers.  Those licensing activities were included, and are still
included, in the Licensing segment.  However, the operations of
developing, producing and distributing our own theatrical releases are reported
in our Film Production segment, as these operations are inherently different
than that of licensing our characters.  While we expect continued
benefit from current movie licenses, our current plans are to self-produce all
future films based on our characters that are not licensed to third
parties.  The film facility is described below.




The
increased exposure of Marvel characters in movies and television shows can
create revenue opportunities through increased sales of publishing materials and
licensed merchandise.  Prior to 2006, we expanded our character brands
principally through licensing them to third parties for developing movie and
television shows.   This media licensing strategy, however, has
inherent limitations, both in terms of profit potential and control over items
such as content, release dates, advertising and merchandising
support.  Accordingly, on September 1, 2005, MVL Film Finance LLC, a
newly formed, special-purpose, bankruptcy-remote, wholly-owned consolidated
Marvel subsidiary, closed a $525 million financing facility that has enabled us
to begin producing our own slate of feature films.  The film facility
provides us with another vehicle for potential growth.  Films produced
by the Film Production segment through the film facility could provide us with a
meaningful source of profits and more control over our film
projects.  It will also give us greater flexibility to coordinate the
timing of licensing programs around Marvel-branded theatrical
releases.  We expect to benefit in 2008 from a level of coordination
between licensing and film production activities that would not have been
possible if those activities were not all performed under one roof.




Licensing




Our
Licensing segment is responsible for the licensing, promotion and brand
management for all of our characters worldwide. We pursue a strategy of
concentrating our licensee relationships with fewer, larger licensees who
demonstrate the financial and merchandising capability to manage our portfolio
of both classic and movie properties.  A key focus is negotiating strong
minimum guarantees while keeping royalty rates competitive.




Another
strategy of the Licensing segment’s consumer products program is to create new
revenue opportunities by further segmenting our properties to appeal to new
demographic profiles. Initiatives such as Spider-Man and Friends, Marvel Retro
and Marvel Juniors have all helped the licensing business expand beyond its
traditional classic and event-driven properties.




17
 TOC





Major
entertainment events play an important role in driving sales of licensed
products, and a significant portion of the Licensing segment’s 2006 initiatives
were focused on the movie Spider-Man 3, which was
released worldwide in May 2007.  In 2007, our licensing segment
revenue reflects the benefit of the release of Spider-Man 3. The Licensing
segment’s 2007 initiatives were focused on our self-produced Iron Man and The Incredible Hulk movies,
which are scheduled for release in May and June 2008,
respectively.  We expect that our 2008 Licensing segment revenue will
benefit from the release of theIron Man and The Incredible Hulk movies,
but not as significantly as 2007 Licensing segment revenue benefited from the
release of Spider-Man
3.




We
typically enter into multi-year merchandise license agreements that specify
minimum royalty payments and include a significant down payment upon signing. We
recognize license revenue when the earnings process is complete, including, for
instance, the determination that the credit-worthiness of the licensee
reasonably assures collectibility of any outstanding minimum royalty
payments.  If the earnings process is complete with respect to all
required minimum royalty payments, then we record as revenue the present value
of those payments.




The
earnings process is not complete if, among other things, we have significant
continuing involvement under the license, we have placed restrictions on the
licensee’s ability to exploit the rights conveyed under the contract or we owe a
performance obligation to the licensee.  In the case where we have
significant continuing involvement or where any restrictions remain on the
licensee’s rights (e.g., no sales of products based on a specific character
allowed until a future date), we recognize revenue as the licensee reports its
sales and corresponding royalty obligation to us. Where we have a performance
obligation, minimum royalty collections are not recognized until our performance
obligation has been satisfied. Minimum payments collected in advance of
recognition are recorded as deferred revenue.  In any case where we
are unable to determine that the licensee is sufficiently creditworthy, we
recognize revenue only to the extent of cash collections.  When
cumulative reported royalties exceed the minimum royalty payments, the excess
royalties are recorded as revenue when collected and are referred to as
“overages”.




Publishing




We
experienced continued growth from the direct market and bookstores in 2007. The
Publishing segment is focused on expanding distribution to channels such as the
mass market, and expanding its product line to a younger
demographic.  We are in the process of expanding our advertising and
promotions business with an increased emphasis on custom
publishing.  In the second quarter of 2006, the Publishing segment
began publishing Civil
War, a limited edition comic book series with tie-ins to certain
established comic book series.  The five issues of Civil War published
in 2006 were the year’s five top-selling comic books in the U.S. and the
last two issues of Civil War were the second and third top-selling comic books
of 2007.  As expected, we experienced continued momentum from Civil War and its tie-ins
during 2007, and the release of trade paperbacks related to Civil War and the release of
the related series, The Death
of Captain America.  The single issue featuring the death of
Captain America was the top-selling comic book of 2007.  In addition,
during 2007, we released the Stephen King series Dark Tower: The Gunslinger
Born and releasedWorld
War Hulk, a limited edition comic book series with tie-ins to other
established comic book series.  A hardcover collected edition of the
Dark Tower series was a best-seller among bookstores and in the direct
market.   The One More Day/Brand New Day
storyline featuring Spider-Man that began in late 2007 led to Marvel
consolidating the three monthly Spider-Man titles into one Spider-Man title that
will be published three times a month.  In Spring 2008, Marvel plans
to publish another major series titled Secret Invasion that will
involve many of the Marvel characters and feature tie-ins to many of the Marvel
publications, similar to the Civil War
series.  The second volume of theDark Tower series is also
planned.  We expect the momentum from the Dark Tower series andOne More Day/Brand New Day
to continue into 2008 and that Secret Invasions will provide
additional momentum.




18
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Toys




In
January 2006, we entered into a license agreement with Hasbro under which Hasbro
has the exclusive right to make action figures, plush toys and role-play toys,
and the non-exclusive right to make several other types of toys, featuring our
characters.  The license gives Hasbro the right to sell those toys at
retail from January 1, 2007 through December 31, 2011.  In some cases,
however, Hasbro was permitted to sell toys at retail at the end of
2006.  The license is subject to extension in the event that
entertainment productions featuring our characters are not released according to
an agreed-upon schedule.  We also entered into a services agreement
with Hasbro under which we have agreed to provide brand expertise, marketing
support and other services in connection with the licensed toys.  In
2006, royalty and service fee income recognized from Hasbro aggregated $5.2
million.  Most of the Toy segment’s 2006 sales, however, came from
toys that we produced and sold ourselves.




During
2007, our Toy segment’s sales consisted primarily of royalties and service fees
from Hasbro, which aggregated $70.9 million.  The Toy segment also
generates revenue from sales of licensed-in properties such as Curious
George.




Film Production




The
expansion of our studio operations to include feature films that we are
producing ourselves resulted in the creation of a new segment commencing in
2006, the Film Production segment.  Previously, Marvel Studios’
operations related solely to the licensing of our characters to third-party
motion picture and television producers.  Those licensing activities
were included, and are still included, in the Licensing segment. However, the
operations of developing and producing our own theatrical releases are reported
in our Film Production segment, as these operations are inherently different
than that of licensing our characters.  Our self-produced films are
financed primarily with our $525 million film facility and our Iron Man and
Hulk facilities, which are described below.




We expect
the Film Production segment’s 2008 operations to look very different from its
2007 operations.  In 2008, we will release our first self-produced
films, and begin to recognize revenue and to amortize our film inventory as
described below.




Film
Inventory




In
general, we are responsible for all of the costs of developing and producing our
feature films.  The film’s distributor is responsible for the
out-of-pocket costs, charges and expenses (including contingent compensation and
residual costs, to a defined limit) incurred in the distribution, manufacturing,
printing and advertising, marketing, publicizing and promotion of the film in
all media.  After remitting to us five percent of the film’s gross
receipts, the distributor is entitled to retain a fee based upon the film’s
gross receipts and to recoup all of its costs on a film-by-film basis prior to
our receiving any additional cash proceeds.  Any of the distributor’s
costs for a film that are not recouped against receipts for that film are borne
by the distributor.




In
accordance with the AICPA Statement of Position 00-2, “Accounting by Producers
or Distributors of Films” (SOP 00-2), we capitalize all direct film production
costs, such as salaries, visual effects and set construction.  Those
capitalized costs, along with capitalized overhead and capitalized interest
costs, appear on our balance sheet as an asset called film
inventory.  Capitalization of film production overhead and interest
costs commences upon completion of the initial funding requirements of the
production and ceases upon completion of the production.  Production
overhead includes allocable costs, including salaries and benefits (including
stock compensation), of individuals or departments with exclusive or significant
responsibility for the production of films.  Capitalized production
overhead does not include other selling, general and administrative
expenses.




In
accordance with SOP 00-2, we also capitalize, into film inventory, the costs of
projects in development.  Those costs consist primarily of script
development.  In the event that a film is not scheduled for production
within three years from the time of the first capitalized transaction, or if an
earlier decision is made to abandon the project, all capitalized costs will be
expensed.




19
 TOC




Once a
film is released, in accordance with SOP 00-2, the amount of film inventory
relating to that film is amortized and included in each period’s costs of
revenue in the proportion that the film’s revenue during the period (“Current
Revenue”) bears to the film’s then-estimated total revenue over a period not to
exceed ten years (“Ultimate Revenue”).  The amount of film inventory
amortized into costs of revenue as a percentage of film revenue may vary from
period to period due to several factors, including changes in the mix of films
earning revenue, and changes in any film’s Ultimate Revenue and
costs.




The first
two films under production by the Film Production segment, Iron Man and The Incredible Hulk, are
scheduled for release in May and June 2008, respectively.  As of
December 31, 2007, our Film Production segment had film inventory of $264.8
million, primarily for these productions.  In addition, for the year
ended December 31, 2007, the Film Production segment incurred $8.7 million in
selling, general and administrative expenses, consisting primarily of
non-capitalized employee compensation and the segment’s share of the expenses
associated with our California office.




Revenue




The
amount of revenue recognized from our films in any given period depends on the
timing, accuracy and sufficiency of the information we receive from our
distributors.




Revenue
from the theatrical distribution of our films in most territories will begin to
be recognized when theatrical receipts are reported to us by the film’s
distributor.  In these territories, we will recognize revenue from
each film in the amount of five percent of gross receipts and, beyond that, to
the extent that gross receipts exceed the distributor’s fee and the costs
payable by the distributor.  There are five territories in which we
have received minimum guaranties from local distributors.  In those
territories, we will begin to recognize revenue when the film is available for
exhibition in theaters.




Revenue
from the sale of home video units will be recognized when video sales to
customers are reported by our distributors.  We will follow the
practice of providing for future returns of home entertainment product at the
time the products are sold.  We will calculate an estimate of future
returns of product by analyzing a combination of our distributors’ historical
returns, our distributors’ estimates of returns of our home video units, current
economic trends, projections of consumer demand for our home video units and
point-of-sale data available from retailers.  Based on this
information, a percentage of each sale will be reserved for possible returns,
provided that the customer has the right of return.  Generally,
customer payment terms are expected to be within 90 days from the end of the
month in which the product will be shipped.  Actual returns will be
charged against the reserve.




Revenue
from both free and pay television licensing agreements will be recognized at the
time the production is made available for exhibition in those
markets.




Changes
in estimates of future Ultimate Revenues from feature films could result in the
write-off or the acceleration of the amortization of film
inventory.  Unamortized film inventory is evaluated for impairment
each reporting period on a film-by-film basis.  If estimated remaining
revenue is not sufficient to recover the unamortized film inventory, the
unamortized film inventory will be written down to fair value.  In any
given quarter, if the Film Production segment lowers its forecast of Ultimate
Revenue for any individual film, we will accelerate the amortization of the film
inventory related to that film.




20
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Film
Facility




The film
facility enables us to independently finance the development and production of
up to ten feature films, including films that may feature the following Marvel
characters, whose theatrical film rights are pledged as collateral to secure the
film facility:




·
            Ant-Man


·
            Black
      Panther


·
            Captain
      America


·
            Cloak
      & Dagger


·
            Doctor
      Strange


·
            Hawkeye


·
            Iron
      Man


·
            Nick
      Fury


·
            Power
      Pack


·
            Shang-Chi


·
            The
      Avengers


·
            The
      Incredible Hulk




Also
included as collateral for the film facility are the theatrical film rights to
many of the supporting characters that would be most closely associated with the
featured characters and character families. For example, the theatrical film
rights to The Incredible Hulk’s girlfriend, Betty Ross, and his nemesis,
Abomination, are both pledged as collateral to the film facility.




We fund,
from working capital and other sources, the incremental overhead expenses and
costs of developing each film to the stage at which the conditions for an
initial borrowing for the film are met under the film facility.  If
the film’s initial funding conditions are met, we are able to borrow under the
film facility an amount equal to the incremental overhead expenses incurred by
us related to that film in an amount not exceeding 2% of the budget for that
film under the film facility, plus development costs. If the initial funding
conditions are not met, we will be unable to borrow these amounts under the film
facility.  In February 2007 and June 2007, Iron Man and The Incredible Hulk,
respectively, met their initial funding conditions and funding of these
productions began.




We
recorded interest expense, net of interest capitalized, related to the film
facility of $13.7 million and $12.8 million during the years ended December 31,
2007 and 2006, respectively.  Interest charges associated with
borrowings to fund the productions are capitalized during the production and
post-production periods, rather than expensed.  Our interest expense
related to the film facility will increase in 2008, when the Iron Man and The Incredible Hulk
productions are completed, which will then require that interest costs incurred
related to the borrowings for these productions be expensed.  During
the years ended December 31, 2007 and 2006, interest associated with film
productions of $8.4 million and $0.2 million, respectively, was capitalized and
was included in film inventory on the accompanying consolidated balance
sheet.




While theatrical films featuring the
characters listed above may be financed and produced by us only through the film
facility, we retain all other rights associated with those characters. In
addition, we may continue to license our other characters for movie productions
by third parties, obtain financing to produce movies based on those other
characters ourselves or with others or, with the consent of the film facility
lenders, finance and produce films based on those other characters through the
film facility.




21
 TOC







Our
Results of Operations




Year
ended December 31, 2007 compared with the year ended December 31,
2006




Net
Sales




Our net
sales are generated from (i) licensing the Marvel characters for use on consumer
products, promotions, feature films, television programs, theme parks and
various other areas; (ii) publishing comic books and trade paperbacks, including
related advertising revenues; and (iii) selling our toys.











Years
      ended December 31,2007
            
            2006
            
            %
      Change(dollars
      in millions)Licensing
            $
            272.7
            
            
            $
            127.2
            
            114%Publishing
            
            125.7
            
            
            
            108.5
            
            16%Toys
            
            87.4
            
            
            
            116.1
            
            (25)%Total
            $
            485.8
            
            
            $
            351.8
            
            38%









Sales
      Mix by Segment:
            
            Years
      ended December 31,2007
            
            2006Licensing
            
            56
            %
            
            
            36
            %Publishing
            
            26
            %
            
            
            31
            %Toys
            
            18
            %
            
            
            33
            %Net
      Sales
            
            100
            %
            
            
            100
            %









Our
consolidated net sales of $485.8 million for 2007 were $134.0 million higher
than net sales in 2006.  This was principally due to the 114% increase
in Licensing segment net sales, which was mostly attributable to revenue related
to Spider-Man 3
merchandising through the joint venture with Sony Pictures Entertainment Inc.
(“Sony Pictures”), called Spider-Man Merchandising L.P. (the “Joint
Venture”).  In addition, Publishing segment net sales increased
16%.  These increases were partially offset by a 25% decrease in Toy
segment net sales.




Licensing
segment net sales increased $145.5 million during 2007, mostly due to a $117.9
million increase in Joint Venture revenue related to the May 2007 release of
Spider-Man
3.  There was no merchandise licensing revenue recorded for
Spider-Man 3 until the
first quarter of 2007, when licensees were first permitted to begin exploiting
merchandise relating to Spider-Man 3.  Licensing
segment net sales also benefited during 2007 from $18.3 million received in
settlements of audit claims, an unusually high amount, and a $4.0 million
increase in overages revenue.  Studio licensing revenue increased $5.8
million, principally due to revenues associated with the Spider-Man movie
properties.  The significant increase in Joint Venture revenue caused
2007 Licensing segment net sales to increase as a percentage of consolidated net
sales from 36% in 2006 to 56% in 2007.  Full-year 2007 revenues in our
Licensing segment are expected to be higher than in 2008, both in dollars and as
a percentage of net sales, primarily due to the expected decrease in licensing
revenue associated with Spider-Man 3.




22
 TOC







Net sales
from the Publishing segment increased $17.2 million to $125.7 million in 2007,
primarily due to an increase of $10.0 million in sales of trade paperbacks and
hard cover books and an increase of $3.9 million in comic book
sales.  The increase in trade paperbacks and hard covers is
attributable to an increase in the sale of Civil Warand Dark Tower trade
paperbacks.  The growth also reflects an increase in trade titles
published.  Comic book sales in 2007 benefited from strong unit sales
of the final two comic-book issues of the Civil War series; The Death of Captain America;
the Stephen King series, Dark
Tower: The Gunslinger Born; and the World War Hulk
series.  Custom publishing also increased $2.3 million due to an
increase in the value and number of projects.  Although Publishing
segment net sales increased from 2006 to 2007, because of the larger relative
increases in Licensing segment net sales, Publishing segment net sales decreased
as a percentage of consolidated net sales from 31% in 2006 to 26% in
2007.  We expect that 2008 Publishing segment net sales will benefit
from the release of the second series of the Dark Tower,and from Secret Invasion,a limited
special comic book series expected to be released in Spring 2008.




In 2007,
Toy segment net sales consisted mostly of royalty and service fee revenues
earned from Hasbro, whereas Toy segment net sales in 2006 were based on our
sales to retailers.  As a result of this change, Toy segment net sales
in 2007 decreased $28.7 million compared to the prior year and also decreased as
a percentage of consolidated net sales.  During 2007, Toy segment net
sales included $70.9 million of royalty and service fee revenue associated with
Hasbro’s sales to retailers.  The Toy segment also derived revenue
from the sale of licensed-in properties of $14.0 million, which represented a
$3.3 million decrease from the sale of licensed-in properties during
2006.  Toy segment net sales in 2008 will continue to consist
primarily of royalty and service fee revenues earned from Hasbro.




Cost
of Revenues





Years
      ended December 31,2007
            
            2006Amount
            
            %
      of Net Segment Sales
            
            Amount
            
            %
      of Net Segment Sales(dollars
      in millions)Licensing
            $
            –
            
            
            N/A
            $
            –
            
            N/APublishing
            
            52.2
            
            
            42%
            
            47.2
            
            44%Toys
            
            8.7
            
            
            10%
            
            56.4
            
            49%Total
            $
            60.9
            
            
            13%
            $
            103.6
            
            29%





Consolidated
cost of revenues decreased $42.7 million to $60.9 million during 2007 compared
with 2006, primarily due to the reduction of toy-production costs resulting from
our cessation of the direct manufacture and sale of Marvel-branded toys.
Consequently, our consolidated cost of revenues as a percentage of sales
decreased to 13% during 2007, as compared to 29% in 2006.




Publishing
segment cost of revenues for comic book and trade paperback publishing consists
of art, editorial, and printing costs.  Art and editorial costs,
consisting of compensation to editors, writers and artists, account for the most
significant portion of publishing cost of revenues.  We generally hire
writers and artists on a non-exclusive freelance basis but we also have
exclusive contracts with certain key writers and artists.  In
addition, we outsource the printing of our comic books to unaffiliated companies
and these costs are subject to fluctuations in paper and ink
prices.  Publishing segment cost of revenues as a percentage of
Publishing segment net sales decreased from 44% during 2006 to 42% during
2007.  Rising costs of talent, ink and paper in 2007 were absorbed by
higher unit sales of comic and trade books.  In addition, larger print
runs in 2007 resulted in lower unit costs and generated higher
margins.  The increase in cost of revenue of $5.0 million is primarily
associated with increased sales.




23
 TOC







Toy
segment cost of revenues consists of product and package manufacturing, shipping
and buying agents’ commissions.  The most significant portion of cost
of revenues is product and package manufacturing.  The decrease in Toy
segment cost of revenues from 49% of Toy segment net sales in 2006 to 10% in
2007 reflects the elimination of manufacturing costs to produce Marvel-branded
toys, as discussed above.  Toy segment cost of revenue will continue
to remain at these decreased levels or lower in 2008 as Hasbro continues to
manufacture and sell Marvel-branded toys.




Selling,
General and Administrative Expenses





Years
      ended December 31,2007
            
            2006Amount
            
            %
      of Net Segment Sales
            
            Amount
            
            %
      of Net Segment Sales(dollars
      in millions)Licensing
            $
            75.7
            
            
            28%
            $
            49.2
            
            39%Publishing
            
            19.9
            
            
            16%
            
            17.2
            
            16%Toys
            
            20.8
            
            
            24%
            
            28.0
            
            24%Film
      Production
            
            8.7
            
            
            N/A
            
            6.0
            
            N/ACorporate
      Overhead
            
            22.0
            
            
            N/A
            
            22.7
            
            N/ATotal
            $
            147.1
            
            
            30%
            $
            123.1
            
            35%







Consolidated
selling, general and administrative (“SG&A”) expenses of $147.1 million in
2007 were $24.0 million greater than SG&A expenses in 2006, primarily due to
increases in the Licensing segment.  Consolidated SG&A as a
percentage of net sales decreased to 30% in 2007 from 35% during 2006, primarily
due to the significant increase in Joint Venture Licensing segment net
sales.




Licensing
segment SG&A expenses consist primarily of payroll, agents’ foreign-sales
commissions and royalties owed to movie studios and talent for their share of
license royalty income, which are variable expenses based on licensing
revenues.  We pay movie studio licensees up to 50% of
merchandising-based royalty revenue (after certain contractually agreed-upon
deductions) from the licensing of both “classic” and “movie” versions of
characters featured in the films.  Licensing segment SG&A expenses
in 2007 reflect an increase of $7.2 million in agents’ foreign sales commissions
and an $11.8 million increase in royalties payable to actors for use of their
likeness in licensed products.  There were also increases in
connection with licensing promotion expense related to the Joint Venture and
increased professional fees as we pursued audits of our
licensees.  Also, during 2007, we recorded a non-recurring charge of
$4.7 million related to a contractual obligation.  As a percentage of
Licensing segment net sales, Licensing segment SG&A decreased significantly
from 39% to 28%.  This resulted from the significant increase in
licensing revenue derived from the activities of the Joint Venture, of which
Sony Pictures’ share is reflected as minority interest expense rather than
SG&A.




Publishing
segment SG&A expenses consist primarily of payroll, distribution fees and
other miscellaneous overhead costs.  Publishing segment SG&A
expenses increased $2.7 million during 2007 over 2006, principally due to
increased employee compensation and increased distribution fees associated with
increased sales.  Publishing segment SG&A expenses as a percentage
of Publishing segment net sales during 2007 remained consistent with the
percentage in 2006.




24
 TOC







Toy
segment SG&A expenses consist primarily of payroll, advertising, development
costs, royalties payable to movie studios for their share of certain toy sales,
and royalties payable on toy sales based on characters licensed from third
parties, such as Universal Studios Licensing LLLP (licensor of the Curious
George character), and on toys developed by outside inventors.  Toy
segment SG&A expenses decreased $7.2 million during 2007 principally as a
result of the establishment of additional reserves in 2006 for estimated
uncollectible amounts due from Toy Biz Worldwide, Ltd. (“TBW”) in the amount of
$2.6 million, which were reduced by $1.4 million in 2007 upon settling with
TBW.  This caused a decrease of $4.0 million in Toy segment SG&A
in 2007 compared with the prior year.  In addition, general selling
expenses decreased $3.1 million and payroll decreased $5.3 million as a result
of the shift to Hasbro discussed above.  These decreases were
partially offset by a $7.2 million increase in royalties, primarily payable to
studios.  We also recorded a $1.1 million charge in connection with a
toy recall, of which $0.7 million was reflected in SG&A.  The 26%
reduction in SG&A expenses caused SG&A expenses as a percentage of Toy
segment sales in 2007 to remain consistent with the percentage in 2006, despite
the 25% decrease in Toy segment revenue that was caused by the shift from
selling Marvel-branded toys to earning royalty and service fee income from
Hasbro.




SG&A
expenses for our Film Production segment consist primarily of employee
compensation and the allocated expenses associated with our California office.
The Film Production segment was created in September 2005, upon execution of the
film facility.  The $2.7 million increase in Film Production SG&A
expenses in 2007 compared to 2006 reflects the ramp-up of our film production
business, which was partially offset by the capitalization of overhead costs
related to The Incredible
Hulk and Iron
Man film productions aggregating $1.0 million during 2007.




Corporate
overhead expenses in 2007 decreased $0.7 million compared with 2006 primarily
from a $1.9 million non-recurring credit associated with pension accounting for
the Fleer/Skybox International Retirement Plan and a $0.4 million decrease in
consulting and payroll related expenses, offset by a $1.8 million increase in
legal fees.




Depreciation
and Amortization




Depreciation
and amortization expense decreased $8.3 million to $6.0 million in 2007 (from
$14.3 million in 2006) as a result of decreased tooling costs due to the
cessation of our production of Marvel-branded toys.





We
account for our goodwill under the provisions of SFAS No. 142, “Goodwill and
Other Intangible Assets” (“SFAS 142”).  Accordingly, goodwill is not
amortized but is subject to annual impairment tests. Our most recent annual
impairment review did not result in an impairment charge.




Other
Income




Other
income increased $0.8 million to $2.6 million in 2007 (from $1.8 million in
2006).  During 2007, other income primarily resulted from $2.1 million
in realized gains generated from forward contracts entered into during 2007 to
mitigate our risk of fluctuations in the Canadian dollar related to the Canadian
filming of The Incredible
Hulk.Other income also benefited from $0.6 million in sales of fully
depreciated tooling used by our Toy segment.  These increases were
partially offset by a $0.9 million decrease in the fair value of the interest
rate cap associated with the film facility.




During
2006, other income consisted principally of $1.6 million of non-recurring income
resulting from payments received for our agreement to vacate leased property
earlier than provided for in a lease and our agreement to allow our tenant to
vacate property earlier than provided for in its lease and $0.8 million in sales
of fully depreciated tooling used by our Toy segment.  These increases
were offset by a $1.5 million decrease in the fair value of the interest rate
cap associated with the film facility.




25
 TOC







Operating
Income







Years
      ended December 31,2007
            
            2006Amount
            
            Margin
            
            Amount
            
            Margin(dollars
      in millions)Licensing
            $
            196.1
            
            
            72%
            $
            77.6
            
            61%Publishing
            
            53.5
            
            
            43%
            
            44.1
            
            41%Toys
            
            54.7
            
            
            63%
            
            21.1
            
            18%Film
      Production
            
            (7.5
            )
            
            N/A
            
            (7.5
            )
            N/ACorporate
      Overhead
            
            (22.4
            )
            
            N/A
            
            (22.7
            )
            N/ATotal
            $
            274.4
            
            
            56%
            $
            112.6
            
            32%





Consolidated
operating income increased $161.8 million to $274.4 million during 2007,
primarily due to the significant increase in net sales from the Licensing
segment, which generates the highest margins.  In addition, margins in
the Toy segment were significantly higher in 2007 as a result of the shift,
described above, to high margin licensing and service fee revenues earned from
Hasbro.  This also caused consolidated operating margins to increase
significantly, from 32% during 2006 to 56% during 2007.




Operating
income in the Licensing segment increased $118.5 million, and operating margins
increased from 61% to 72%, primarily due to increases in merchandise licensing
revenue from the Joint Venture.  The margins of Joint Venture
merchandise licensing are higher than most other merchandise licensing because
Sony Pictures’ share of the Joint Venture’s operating results is classified as
minority interest expense, whereas other studios’ shares of license royalty
income is recorded within SG&A expense.




Operating
income in the Publishing segment increased $9.4 million and margins improved
from 41% in 2006 to 43% in 2007 due to the increase in net sales volume with
improved gross margins resulting from larger print runs of more successful
titles.




Operating
income in the Toy segment increased $33.6 million in 2007 compared with 2006
predominantly due to the high margin royalty and service fee income
derived from sales of toys related to the Spider-Man 3 feature
film as well as the reduction in SG&A
expenses.  Operating margins increased to 63% in 2007 from 18% in 2006
predominantly as a result of higher margins from royalty and service fees based
on Hasbro’s sales to retailers in 2007, compared with lower margins earned from
our own lower sales to retailers in 2006.




During
2007, the Film Production operating loss reflects the SG&A costs noted above
and a charge of $0.9 million for the decrease in the fair value of the interest
rate cap associated with our film facility, offset by a $2.1 million increase in
the fair value of forward contracts for the Canadian dollar.  The
forward contracts were entered into during 2007 in connection with the
production of The Incredible
Hulk.  During 2006, the Film Production operating loss reflects
the SG&A costs noted above and a charge of $1.5 million for the decrease in
the fair value of the interest rate cap.




During
2007 and 2006, the Corporate Overhead operating loss primarily reflects the
SG&A costs noted above.




26
 TOC







Interest
Expense




Years
      ended December 31,2007
            
            2006(dollars
      in millions)Interest
      incurred, HSBC line of credit
            $
            0.1
            
            
            $
            2.4Interest
      incurred, film facilities
            
            22.1
            
            
            
            13.0Total
      Interest incurred
            
            22.2
            
            
            
            15.4Less:
      Interest capitalized
            
            (8.4
            )
            
            
            (0.2
            )Total
            $
            13.8
            
            
            $
            15.2







From 2006
to 2007, there was a $6.8 million increase in the amount of interest we
incurred.  The increase was primarily the result of borrowings for the
movie productions Iron
Man (beginning in the first quarter of 2007) and The Incredible Hulk
(beginning in the second quarter of 2007), offset by a decrease in our
short-term borrowings under our HSBC line of credit to finance repurchases of
our common stock.  During 2007, $8.4 million of interest cost related
to movie production borrowings was capitalized into film inventory, an increase
of $8.2 million over the 2006 amount.  This led to a $1.4 million net
reduction in interest expense from 2006 to 2007.




Interest
Income




Interest
income reflects amounts earned on our cash equivalents and short-term
investments.  Interest income increased $1.1 million to $2.6 million
in 2007 as compared to 2006, due to higher levels of cash equivalents and
short-term investments in 2007 than in 2006.




Income
Taxes




Our
annual effective tax rate differs from the federal statutory rate due to the
effects of state and local taxes and elimination of the minority share of Joint
Venture earnings from reported income before income tax expense.  Our
effective tax rates for the years ended December 31, 2007 and 2006 were 37.6%
and 39.5%, respectively.  The 1.9% reduction in the effective tax rate
was principally caused by higher Joint Venture income, partially offset by state
and local income taxes.




We are
not responsible for the income taxes related to the minority share of the Joint
Venture’s earnings.  The tax liability associated with the
minority share of the Joint Venture’s earnings is therefore not reported in
our income tax expense, even though the Joint Venture’s entire income is
consolidated in our reported income before income tax expense.  Joint
Venture earnings therefore have the effect of lowering our effective tax rate.
 This effect is more pronounced in periods in which Joint Venture earnings
are higher relative to our other earnings.




We retain
various state and local net operating loss carryforwards of $354 million, which
will expire in various jurisdictions in the years 2008 through
2026.  As of December 31, 2007, there is a valuation allowance of $1.2
million against capital loss carryforwards and state and foreign net operating
loss carryforwards, as we believe it is more likely than not that those assets
will not be realized in the future.




We or one
of our subsidiaries file income tax returns in the U.S. federal jurisdiction,
and various state, local and foreign jurisdictions.   We are no
longer subject to tax examinations in any jurisdiction for 2002 and prior tax
years.  The Internal Revenue Service is examining our 2003
through 2006 tax years.  We are also under examination by various
state and local jurisdictions.




Minority
Interest




Minority
interest expense, related to the Joint Venture, amounted to $24.5 million in
2007 and $1.0 million in 2006.  This increase of $23.5 million
reflects the increased operations from licensing associated with the Spider-Man
films, the most recent of which was the May 2007 release of Spider-Man 3.




27
 TOC






Earnings
per Share




Diluted
earnings per share increased to $1.70 in 2007 from $0.67 in 2006 reflecting a
138% increase in net income and a 5.5% reduction in the weighted average number
of shares outstanding due to the effect of treasury share repurchases (8.5
million shares acquired in 2007).









Year
ended December 31, 2006 compared with year ended December 31, 2005




Net
Sales







Years
      ended December 31,2006
            
            2005
            
            %
      Change(dollars
      in millions)Licensing
            $
            127.2
            
            
            $
            230.1
            
            (45)%Publishing
            
            108.5
            
            
            
            92.4
            
            17%Toys
            
            116.1
            
            
            
            68.0
            
            71%Total
            $
            351.8
            
            
            $
            390.5
            
            (10)%








Sales
      Mix by Segment:
            
            Years
      ended December 31,2006
            
            2005Licensing
            
            36.2
            %
            
            
            58.9
            %Publishing
            
            30.8
            %
            
            
            23.7
            %Toys
            
            33.0
            %
            
            
            17.4
            %Net
      Sales
            
            100.0
            %
            
            
            100.0
            %







Our
consolidated net sales of $351.8 million for 2006 were $38.7 million lower than
net sales in 2005.  A 45% decrease in Licensing segment sales was
partially offset by a 17% increase in Publishing segment sales and a 71%
increase in Toy segment sales.




Licensing
segment net sales decreased $102.9 million during 2006.  The decreases
were in domestic merchandise licensing ($79.1 million), Joint Venture licensing
($20.6 million) and Studio media licensing ($8.0 million).  The
reduction in domestic revenues resulted from a decline in new and renewal
contract revenues in 2006. Included in 2005 Licensing segment net sales was $50
million from the extension of an interactive game license. Also, the 2006
licensing program for the theatrical release of X-Men: The Last Stand did not
generate as much in merchandise royalties as the 2005 program for the theatrical
release of Fantastic
Four.  The Joint Venture (associated with licensing around
Spider-Man movies) had revenue of only $4.1 million in 2006, primarily related
to licensing overages collected in 2006 from the July 2004 release of Spider-Man 2.  Studio media
licensing revenues decreased as a result of fewer movie releases and the timing
of payments for major theatrical releases: significant revenues from Spider-Man
and X-Men movie properties were recorded in 2005 as compared to smaller revenues
from the Fantastic Four movie property in 2006.  These decreases were
partially offset by increased revenues from international licensing ($5.3
million) caused by overage increases net of a decline in new and renewal
contract revenues.The
net decrease in Licensing segment net sales, combined with higher net sales
generated from the Publishing and Toy segments, caused Licensing segment net
sales to decline as a percentage of consolidated net sales.




28
 TOC




Net sales
from the Publishing segment increased $16.1 million to $108.5 million for
2006.  Of the increase, $7.5 million was in sales of trade paperbacks
and hard cover books into the direct and book market channels and $6.4 million
was in comic book sales into the direct market.  Comic book increases
were primarily due to strong sales associated with Civil War,a limited special
comic book series which has tie-ins to established comic book
series.  2006 also benefited from the April 2006 increase in the cover
price of comic books, which accounted for $1.5 million of the comic book
increase noted above.  In addition, custom publishing revenue
increased $1.1 million for 2006. These increases also caused Publishing segment
net sales to increase as a percentage of consolidated net sales.




In 2005,
Toy segment net sales consisted mostly of royalty and service fee revenues
earned from TBW.  As a result of terminating the TBW license at the
end of 2005, 2006 Toy segment net sales of $116.1 million were based on our
sales to retailers.  Primarily as a result of this change, Toy segment
net sales increased $48.1 million compared to the prior year period and also
increased as a percentage of consolidated net sales.  Those increased
revenues, however, reflect a decrease in sales to retailers compared to
2005.  In 2005, Toy segment net sales included $51.8 million of
royalty and service fee revenue earned by us associated with TBW’s sales to
retailers. Sales to retailers decreased from $185.1 million in 2005 to $116.1
million in 2006 partly because of the launch of the Fantastic Four movie toy
line in 2005 and also due to the transition from TBW, which disrupted production
and caused cancellations of certain sales orders.  Toy segment net
sales in 2007 consisted primarily of royalty and service fee revenues earned
from Hasbro.  During the fourth quarter of 2006, we recorded $5.2
million of royalty and service revenue from Hasbro.




Cost
of Revenues







Years
      ended December 31,2006
            
            2005Amount
            
            %
      of Net Segment Sales
            
            Amount
            
            %
      of Net Segment Sales(dollars
      in millions)Licensing
            $
            –
            
            
            N/A
            $
            –
            
            N/APublishing
            
            47.2
            
            
            44%
            
            41.0
            
            44%Toys
            
            56.4
            
            
            49%
            
            9.5
            
            14%Total
            $
            103.6
            
            
            29%
            $
            50.5
            
            13%







Consolidated
cost of revenues increased $53.1 million to $103.6 million for 2006 compared
with 2005, primarily due to increased toy-production costs, resulting from our
direct manufacture and sale of toys formerly licensed to TBW. Consequently, our
consolidated cost of revenues as a percentage of sales increased to 29% for the
year ended December 31, 2006, as compared to 13% in the comparable 2005
period.




Publishing
segment cost of revenues as a percentage of Publishing segment net sales
remained consistent at 44% in 2006 and 2005.  Rising costs of talent
and paper costs in 2006 were offset by higher unit sales of comic books, which
more effectively absorb these costs.  In addition, we instituted price
increases (in April 2006) on certain comic book titles to help offset the rising
talent and paper costs. The increase in cost of revenue of $6.2 million from
$41.0 million to $47.2 million is primarily associated with increased
sales.




The
increase in Toy segment cost of revenues from 14% of Toy segment net sales
during 2005 to 49% during 2006 reflects manufacturing costs to produce toys
formerly produced under license by TBW, for which we incurred no manufacturing
costs.




29
 TOC







Selling,
General and Administrative Expenses







Years
      ended December 31,2006
            
            2005Amount
            
            %
      of Net Segment Sales
            
            Amount
            
            %
      of Net Segment Sales(dollars
      in millions)Licensing
            $
            49.2
            
            
            39%
            $
            87.1
            
            38%Publishing
            
            17.2
            
            
            16%
            
            15.1
            
            16%Toys
            
            28.0
            
            
            24%
            
            39.5
            
            58%Film
      Production
            
            6.0
            
            
            N/A
            
            –
            
            N/ACorporate
      Overhead
            
            22.7
            
            
            N/A
            
            24.8
            
            N/ATotal
            $
            123.1
            
            
            35%
            $
            166.5
            
            43%







Consolidated
selling, general and administrative (“SG&A”) expenses of $123.1 million in
2006 were $43.4 million below SG&A expenses in 2005, primarily due to the
reduction in Licensing SG&A described below.  Consolidated
SG&A as a percentage of net sales decreased to 35% in 2006, from 43% in
2005.




Licensing
segment SG&A expenses of $49.2 million for 2006 were $37.9 million below the
prior year principally as a result of a $27.1 million decrease in royalty
provisions to studios due to the decline in Licensing revenue, and a one-time
$10 million charge in 2005 associated with the settlement of
litigation.  As a percentage of Licensing segment net sales, Licensing
segment SG&A increased slightly from 38% to 39%.




Publishing
segment SG&A expenses increased $2.1 million in 2006 over 2005, principally
due to increased distribution fees associated with increased
sales.  Publishing segment SG&A expenses as a percentage of
Publishing segment net sales remained consistent at 16%.




Toy
segment SG&A expenses decreased $11.5 million in 2006 principally as a
result of reduced advertising ($9.8 million), lower salaries and related
expenses ($1.2 million) due to lower infrastructure and the non-recurring
expense in 2005 for the early termination of TBW ($12.5 million). These
decreases were partially offset by the absence of SG&A reimbursements from
TBW ($7.5 million) and increased warehousing fees ($1.1 million), as a result of
our manufacturing and distributing a higher volume of our own products. In
addition, during 2006 we established reserves for uncollectible amounts due from
TBW in the amount of $2.6 million, and realized a loss of $0.8 million from the
sale of our Mexican land and building.  The net decrease in expense,
combined with the increased Toy segment sales, caused Toy segment SG&A
expenses to decrease as a percentage of Toy segment sales from 58% in 2005 to
24% in 2006.




SG&A
for our Film Production segment consists primarily of employee compensation and
the allocated SG&A associated with our California office. The Film
Production segment was created in September 2005, upon execution of the film
facility. There were no significant SG&A costs within the Film Production
segment in 2005.




Corporate
overhead expenses in 2006 decreased $2.1 million compared with 2005 due to
decreases in legal fees and settlements ($5.6 million) and charitable donations
($2.5 million), partially offset by increases in compensation expense of $6.2
million primarily related to the accounting for stock options and increased
executive compensation.




Depreciation
and Amortization




Depreciation
and amortization expense increased $9.8 million to $14.3 million in 2006 (from
$4.5 million in 2005) as a result of increased tooling required for our
production of toys and the short period of time over which the majority of these
costs were being amortized in 2006.  Tooling, product design and
packaging design costs




30
 TOC






attributable
to the toy business, are normally amortized over the estimated life of the
respective products, which typically range from one to three years. As a result
of the year-end 2006 transition to Hasbro, the life of the tooling, product
design and development and packaging design costs associated with Marvel
character-based toys expired at the end of 2006, and we are no longer producing
these toys.




We
account for our goodwill under the provisions of SFAS No. 142, “Goodwill and
Other Intangible Assets” (“SFAS 142”).  Accordingly, goodwill is no
longer amortized but is subject to annual impairment tests. Our 2006 impairment
review did not result in an impairment charge.




Other
Income




Other
income decreased $0.4 million to $1.8 million in 2006 (from income of $2.2
million in 2005), primarily as a result of a decline in the fair value of the
interest rate cap associated with our film facility.  Changes in the
cap’s fair value are recorded as other income.  During 2006, the cap’s
fair value decreased by $1.5 million.  During 2005, the cap’s fair
value increased by $0.3 million.  This $1.8 million decrease in the
year-to-year changes of the interest rate cap’s fair value was partially offset
by payments received aggregating $1.6 million for our agreement to vacate leased
property earlier than provided for in a lease and for another agreement to allow
our tenant to vacate property owned by us earlier than provided for in our
lease.




Operating
Income







Years
      ended December 31,2006
            
            2005Amount
            
            Margin
            
            Amount
            
            Margin(dollars
      in millions)Licensing
            $
            77.6
            
            
            61%
            $
            143.4
            
            62%Publishing
            
            44.1
            
            
            41%
            
            36.4
            
            39%Toys
            
            21.1
            
            
            18%
            
            15.5
            
            23%Film
      Production
            
            (7.5
            )
            
            N/A
            
            –
            
            N/ACorporate
      Overhead
            
            (22.7
            )
            
            N/A
            
            (24.1
            )
            N/ATotal
            $
            112.6
            
            
            32%
            $
            171.2
            
            44%







Consolidated
operating income decreased $58.6 million to $112.6 million in 2006, primarily
due to lower sales in the Licensing segment, which generates the highest
margins.  This also resulted in decreased operating margins from 44%
in 2005 to 32% in 2006.




Operating
margins decreased slightly in the Licensing segment from 62% in 2005 to 61% in
2006 as a result of lower overall licensing sales and a revenue mix that was
lower in high-margin Joint Venture licensing. The margins of Joint Venture
licensing are higher than others in the Licensing segment because Sony’s share
of the Joint Venture’s operating results is classified as minority interest
expense whereas royalty expense due to other studios is recorded within SG&A
expense.  The decrease caused by the changes in revenue noted above
were partially offset by reduced SG&A costs allocated to the Film Production
segment, which were previously recorded in the Licensing segment.




Operating
margins improved slightly for the Publishing segment from 39% in 2005 to 41% in
2006 due to comic book and trade costs increasing proportionately with increased
sales.




Operating
income in the Toy segment increased $5.6 million in 2006 compared with 2005
predominantly due to the $12.5 million non-recurring expense in 2005 for the
early termination of TBW. Operating margins decreased to 18% in 2006 from 23% in
2005 predominantly as a result of the margin being calculated on sales to
retailers in 2006, compared with margins calculated on royalty and service fee
income in 2005.




31
 TOC




The Film
Production operating costs reflect the SG&A costs noted above and the $1.5
million decline in the fair value of the interest rate cap associated with our
film facility.




Interest
Expense




We had
interest expense of $15.2 million in 2006, compared to interest expense of $4.0
million in 2005.  The $11.2 million increase in net interest expense
is a result of borrowings related to the film facility and borrowings under the
HSBC Line of Credit.  Borrowings under the HSBC Line of Credit were
repaid in early January 2007. Borrowings under the film facility commenced in
September 2005.




Interest
Income




Interest
income reflects amounts earned on our cash equivalents and short-term
investments. Interest income decreased $2.4 million to $1.5 million in 2006
(from $3.9 million in 2005).




Income
Taxes




Our
effective tax rate differs from the federal statutory rate due to the effects of
state and local taxes, income taxes related to the minority share of the Joint
Venture, and income taxes related to unremitted foreign earnings.  Our
effective tax rates for the years ended December 31, 2006 and 2005 were 39.5%
and 36.7%, respectively.  The 2.8% increase in the effective tax rate
primarily results from several factors with partially offsetting
impacts.  The effective rate increased 1.7% due to unremitted foreign
earnings, increased 1.4% for foreign taxes, and increased 3.1% as a result of
the Joint Venture (discussed below).  These increases were partially
offset by a decrease in state and local taxes of 2.7%, attributable primarily to
a reduction in state tax reserves, and a decrease of 0.8% attributable to
valuation allowance changes.




We are
not responsible for the income taxes related to the minority share of the Joint
Venture’s earnings.  The tax liability associated with the
minority share of the Joint Venture’s earnings is therefore not reported in
our income tax expense, even though the Joint Venture’s entire income is
consolidated in our reported income before income tax expense.  Joint
Venture earnings therefore have the effect of lowering our effective tax rate.
 This effect is more pronounced in periods in which Joint Venture earnings
are higher relative to our other earnings.  For 2005, the reduction in
our tax rate related to the minority interest share of Joint Venture income also
includes the benefit of the correction of 2004 tax expense related to the Joint
Venture, a 1.9% decrease to the 2005 tax rate.




As of
December 31, 2006, there is a valuation allowance of $1.1 million against
certain capital, state, and local net operating loss
carryforwards.  The net change in the valuation allowance during the
year ended December 31, 2006 was a decrease of $1.5 million, of which $0.2
million affected income and $1.7 million was recorded against our related
deferred tax assets that were deemed to be permanently
unrealizable.




Minority
Interest




Minority
interest expense, related to the Joint Venture, amounted to $1.0 million in 2006
and $5.4 million in 2005. This decrease of $4.4 million reflects the continued
decreased operations from licensing associated with the July 2004 release of
Spider-Man
2.




Earnings
per Share




Diluted
earnings per share declined from $0.97 in 2005 to $0.67 in 2006 reflecting a 43%
decrease in net income partially offset by an 18% reduction in the weighted
average number of shares outstanding due to the effect of the treasury share
repurchases of 15.6 million shares made in 2006.




32
 TOC




Liquidity
and Capital Resources




Our
primary sources of liquidity are cash, cash equivalents, cash flows from
operations, our film credit facilities and the HSBC line of credit, described
below.  We anticipate that our primary uses for liquidity will be to
conduct our business and to repurchase our common stock.




Net cash
provided by operating activities decreased $164.8 million to ($6.6) million
during 2007, compared to $158.2 million during 2006.  The decrease was
due primarily to an increase of $249.8 million in film production expenditures
which was partially offset by strong cash collections from our licensing and
publishing segment, an advance from Hasbro of $70 million (included in deferred
revenue at December 31, 2007) and income tax refunds received during the
period.




Film-production
expenditures appear on our statement of cash flows as cash used in operating
activities, although the expenditures were funded by draw-downs from our film
facilities, which appear on our statement of cash flows as cash provided by
financing activities.




Our
working capital deficiency increased $49.9 million from $58.6 million at
December 31, 2006 to $108.5 million at December 31, 2007.  This
increase in the deficiency is primarily the result of a decrease of $46.3
million in our current assets that was primarily due to our $212.0 million of
treasury stock repurchases during 2007, which was partially offset by the strong
cash collections noted above.  In addition, we had an increase of
$42.3 million in short-term borrowings to fund long-term film inventory in 2007
related to the Iron Man Facility and Hulk Facility (both of which are defined
below) and a $16.2 million increase in accrued royalties, related to higher
levels of licensing revenue in 2007 as well as amounts due to talent for use of
their likeness in licensed products.  These increases were partially
offset by a $51.5 million reduction of current deferred revenue primarily
related to Spider-Man 3 merchandise licensing, of which a significant portion
was recognized as revenue in the first quarter of 2007, when licensees were
permitted to exploit their licenses.




Net cash
flows used in investing activities for the year ended December 31, 2007 reflect
the purchase of short-term investments using our excess cash and an increase in
restricted cash primarily resulting from strong collections from Joint Venture
activities.  Net cash flows from investing activities for the year
ended December 31, 2006 reflect the sale of short-term investments to finance
our stock repurchase program, which was partially offset by capital expenditures
of $16.3 million, primarily required by the transition from our 2005 master toy
licensee to our manufacturing and selling toys in 2006.




Net cash
provided by financing activities during the year ended December 31,
2007 was reduced by stock repurchases of 8.5 million shares at a cost
of $212.0 million.  The 2007 repurchases were financed through cash
generated from operations.  At December 31, 2007, the unspent
amount available for stock repurchases under the existing Board
authorization was $38.1 million.  In 2006, we repurchased 15.6 million
shares of our common stock at a cost of $287.4 million under a stock repurchase
program authorized in November 2005 and subsequent programs announced on May 4
and June 5, 2006.  During the period January 1, 2008 to February 26,
2008, we repurchased 0.4 million shares of our common stock at a cost of $9.9
million.  We also announced, on February 19, 2008, that our Board
of Directors had increased our share repurchase authorization by $100
million, adding to the $28.2 million then remaining under our prior
share repurchase authorization, and extended the authorization through March 1,
2010.




MVL Film
Finance LLC maintains a $525 million credit facility for the purpose of
producing theatrical motion pictures based on our characters.  The
film facility consists of $465 million in revolving senior bank debt and $60
million in mezzanine debt, which is subordinated to the senior bank
debt.  Both Standard & Poor’s, a division of the McGraw-Hill
Companies, Inc., and Moody’s Investor Rating Service, Inc. have given the senior
bank debt an investment grade rating.  In addition, Ambac Assurance
Corporation has insured repayment of the senior bank debt, raising its rating to
AAA.  In exchange for the repayment insurance, we pay Ambac a fee
calculated as a percentage of senior bank debt. The interest rates for
outstanding senior bank debt, and the fees payable on unused senior bank debt
capacity, both described below, include the percentage fee owed to
Ambac.




The
interest rate for outstanding senior bank debt is LIBOR or the commercial paper
rate, as applicable, plus 1.635% in either case.  The film facility
also requires us to pay a fee on any senior bank debt capacity that we




33
 TOC






are not
using.  This fee is 0.60%, and is applied on $465 million reduced by
the amount of any outstanding senior bank debt.




If
Ambac’s rating by either S&P or Moody’s falls below AAA, the interest rate
for outstanding senior bank debt would increase by 1.30% and the fee payable on
any unused senior bank debt capacity would increase by 0.30%.  If the
senior bank debt’s rating (without giving effect to Ambac’s insurance) by either
S&P or Moody’s falls below investment grade, the interest rate for the
outstanding senior bank debt could increase by up to an additional
0.815%.  In addition, if we become more leveraged, the interest rate
for outstanding senior bank debt could increase by up to an additional
0.50%.  In light of recent adverse developments in the credit markets,
we have assessed the economic impact on our film production activities from the
potential increases in interest rates as described above.  We do not
believe the impact from these potential interest rate increases to be
material.




The
interest rate for the mezzanine debt is LIBOR plus 7.0%.  The
mezzanine debt was drawn on first and will remain outstanding for the life of
the film facility.




As of
December 31, 2007, MVL Film Finance LLC had $246.9 million in total outstanding
borrowings through the film facility to fund the production of our Iron Man and The Incredible Hulk movies,
and to finance transaction costs (and interest thereon) related to the
development and closing of the facility.  We must maintain a minimum
tangible net worth and comply with various administrative covenants. In
addition, conditions to the initial funding of the fifth film to be produced
under the film facility, and each film thereafter, are the satisfaction of an
interim asset test and foreign pre-sales test, as defined in the film facility.
We have maintained compliance with our covenants under the film facility since
its inception.




We
generate pre-sale proceeds from distributors who buy the right to distribute our
self-produced films in the territories of Australia and New Zealand, Japan,
Germany, France and Spain (the “Reserved Territories”).  As
contemplated by the film facility, we use Iron Man’s and The Incredible Hulk’s
pre-sale proceeds toward funding the production of those films.  Most
of the payments from our foreign distributors, however, are not due until after
delivery of the completed film.




In order
to bridge the gap between Iron
Man’s production expenditures and the distributors’ payment described
above, we closed a $32.0 million bridge financing on February 27, 2007 with
Comerica Bank (the “Iron Man Facility”).  The financing was closed
through our wholly-owned consolidated subsidiary, Iron Works Productions LLC,
and proceeds of the financing may only be used to fund the production of our
Iron Man feature
film.  Borrowings under this facility are non-recourse to us and our
affiliates other than with respect to the collateral pledged to this facility,
which consists of various affiliated film companies’ rights to distribute the
Iron Man film in the
Reserved Territories and the contracts that MVL Productions LLC has entered into
with third-party distributors to distribute Iron Man in the Reserved
Territories.  This facility, which expires on July 25, 2008 or sooner if an
event of default occurs, consists of $32.0 million in bank debt but contains a
$2.5 million interest reserve that will prevent us from borrowing the full
amount.  The rate for borrowings under this facility is the bank’s
prime rate or LIBOR plus 1%, at our election.  The facility contains
customary event-of-default provisions and covenants regarding our film-related
affiliates, the production of the Iron Man movie and our
ownership of the intellectual property underlying the Iron Man movie.  As
of December 31, 2007, the Iron Man Facility had $25.5 million in outstanding
borrowings.




Similarly,
in order to bridge the gap between The Incredible Hulk’s
production expenditures and the distributors’ payment described above, we closed
a $32.0 million financing on June 29, 2007 with HSBC Bank USA, National
Association (the “Hulk Facility”) through our wholly-owned consolidated
subsidiary, Incredible Productions LLC, and proceeds of this financing may only
be used to fund the production of our The Incredible Hulk feature film. 
Borrowings under this facility are non-recourse to us and our affiliates other
than with respect to the collateral pledged to this facility, which consists of
various affiliated film companies’ rights to distribute The Incredible Hulkfilm in
the Reserved Territories and the contracts that MVL Productions LLC has entered
into with third-party distributors to distribute The Incredible Hulkin the
Reserved Territories.  This facility, which expires on September 30, 2008
or sooner if an event of default occurs, consists of $32.0 million in bank debt
but contains a $2.3 million interest reserve that will prevent us from borrowing
the full amount.  The rate for borrowings under this facility is the bank’s
prime rate or LIBOR plus 1%, at our election.  The facility contains
customary event-of-default provisions and covenants regarding our film-related
affiliates, the production of The Incredible Hulk movie and
our




34
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ownership
of the intellectual property underlying The Incredible Hulk
movie.  As of December 31, 2007, the Hulk Facility had $16.8 million in
outstanding borrowings.




Upon
delivery of the films to our foreign distributors, we will collect the remaining
minimum guarantees associated with the distribution rights for the
Reserved Territories.  The proceeds from these minimum guarantees
will be used to repay the Iron Man and Hulk facilities.




During
the period from January 1, 2008 through February 26, 2008, we borrowed an
additional $33.9 million under the above facilities.




We
maintain a $100 million revolving line of credit with HSBC Bank USA,
National Association (the “HSBC Line of Credit”) with a sub-limit for the
issuance of letters of credit.  The HSBC Line of Credit expires on
March 31, 2010.  Borrowings under the HSBC Line of Credit may be used
for working capital and other general corporate purposes and for repurchases of
our common stock.  During the quarter ended September 30, 2007, the
HSBC Line of Credit was amended to replace the minimum net worth covenant with a
net income covenant and a minimum market capitalization
requirement.  The HSBC Line of Credit, as amended, contains customary
event-of-default provisions, a default provision based on our market
capitalization and covenants regarding our net income, leverage ratio and
free cash flow.  The HSBC Line of Credit is secured by a first
priority perfected lien in (a) our accounts receivable, (b) our rights under our
toy license with Hasbro and (c) all of our treasury stock repurchased by us
after November 9, 2005. Borrowings under the HSBC Line of Credit bear
interest at HSBC’s prime rate or, at our choice, at LIBOR plus 1.25% per
annum.  As of December 31, 2007, we had no borrowings outstanding
under the HSBC Line of Credit.




We are in
compliance with all of our covenants under the above debt
arrangements.




Our
capital expenditures for the years ended December 31, 2007 and 2006 were $2.7
million and $16.3 million, respectively.  We do not expect to have
significant capital expenditures in 2008.




In
connection with The Incredible
Hulk production, we enter into forward currency contracts to mitigate our
exposure to fluctuations in the value of the Canadian dollar.  As of
December 31, 2007, we had no outstanding contracts.  As of February
26, 2008, we have $12.4 million of contracts outstanding.  The average
Canadian dollar to US dollar exchange rate of these outstanding contracts is
$0.989.




We
believe that our cash and cash equivalents, cash flows from operations, the film
facilities, the HSBC line of credit and other sources of liquidity will be
sufficient for us to conduct our business and make repurchases, if any, under
our current stock repurchase program.




The
following table sets forth our contractual obligations as of December 31,
2007:







Contractual
      Obligations
            
            Payments
      Due By PeriodLess
      than
            
            
            
            
            
            
            
            
            More
      Than(Amounts
      in thousands)
            
            
            Total
            
            
            1
      Year
            
            
            1-3
      Years
            
            
            3-5
      Years
            
            
            5
      YearsLong-term
      debt obligations *
            
            $
            289,126
            
            $
            42,264
            
            $
            246,862
            
            $
            –
            
            $
            –Capital
      lease obligations
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Operating
      lease obligations
            
            
            8,967
            
            
            2,627
            
            
            4,882
            
            
            1,458
            
            
            –Licensed-in
      toy royalty obligations
            
            
            1,200
            
            
            1,200
            
            
            –
            
            
            –
            
            
            –Other
      long-term liabilities reflected on the registrant’s balance sheet under
      GAAP
            
            
            7,710
            
            
            1,000
            
            
            2,000
            
            
            2,000
            
            
            2,710Expected
      pension benefit payments
            
            
            14,883
            
            
            1,335
            
            
            2,722
            
            
            2,903
            
            
            7,923Total
            
            $
            321,886
            
            $
            48,426
            
            $
            256,466
            
            $
            6,361
            
            $
            10,633







*Scheduled
repayment based on the minimum expected term of the film facility. Such amount
may be repaid earlier depending on the success of theatrical releases under the
film facility.




35
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Our
balance sheet includes $54.1 million of non-current tax reserves for uncertain
tax positions under FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”),
however, it is not possible to predict or estimate the timing of payments for
these obligations.  We do not expect to make any significant payments
for these uncertain tax positions within the next twelve months.




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 of
America. Management reviews the accounting policies it uses in reporting our
financial results on a regular basis. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates. Management estimates include amounts related to
provisions for returns, other sales allowances and doubtful accounts, the
realizability of inventories, the realizability of goodwill, the reserve for
uncollected minimum royalty guarantees, valuation allowances for deferred income
tax assets and reserves for uncertain tax positions, depreciation and
amortization periods for equipment, the recovery of film inventory, Fleer
pension plan assumptions, litigation related accruals, character allocation in
computing studio share royalties payable, and forfeiture rates related to
employee stock compensation. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Results may differ from these estimates due
to actual outcomes being different from those on which management based its
assumptions. These estimates and judgments are reviewed by management on an
ongoing basis, and by the Audit Committee at the end of each quarter prior to
the public release of our financial results. Management believes that the
following critical accounting policies affect its 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, trade paperback and hardcover book sales, returnable
comic books and custom publishing, 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.  We
regularly review and revise, when considered necessary, our estimates of sales
returns based primarily upon actual returns, planned product discontinuances,
and estimated sell-through at the retail level. No provision for sales returns
is provided when the terms of the underlying sales do not permit the customer to
return product to us.  Return rates for returnable comic book sales,
traditionally sold at newsstands and bookstores, are typically higher than those
related to trade paperback and hardcover book sales.




Comic
book revenues – non-returnable and other




Sales of
comic books to the direct market, our largest channel of comic book
distribution, are made on a non-returnable basis and related revenues are
recognized in the period the comic books are made available for sale (on-sale
date established by us).  Revenue from advertising in our comic books
is also recognized in the period that the comic books are made available for
sale.  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.




36
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License
Revenues




Revenue
from licensing our characters is recorded in accordance with guidance provided
in Securities and Exchange Commission Staff Accounting Bulletin No. 104 “Revenue
Recognition” (an amendment of Staff Accounting Bulletin No. 101 “Revenue
Recognition”) (“SAB 104”). Under the SAB 104 guidelines, revenue is recognized
when the earnings process is complete.  This is considered to have
occurred when persuasive evidence of an agreement between us and the customer
exists, when the characters are freely and immediately exploitable by the
licensee and we have satisfied our obligations under the agreement, when the
amount of revenue is fixed or determinable and when collection of unpaid revenue
amounts is reasonably assured.




For
licenses that contain non-refundable minimum payment obligations to us, we
recognize such non-refundable minimum payments as revenue at the inception of
the license, prior to the collection of all amounts ultimately due, provided all
the criteria for revenue recognition under SAB 104 have been
met.  Receivables from licensees due more than one year beyond the
balance sheet date are discounted to their present value.




The
earnings process is not complete if, among other things, we have significant
continuing involvement under the license, we have placed restrictions on the
licensee’s ability to exploit the rights conveyed under the contract or we owe a
performance obligation to the licensee.  In the case where we have
significant continuing involvement or where any restrictions remain on the
licensee’s rights (e.g., no sales of products based on a specific character
allowed until a future date), we recognize revenue as the licensee reports its
sales and corresponding royalty obligation to us. Where we have a performance
obligation, minimum royalty collections are not recognized until our performance
obligation has been satisfied. Minimum payments collected in advance of
recognition are recorded as deferred revenue.  In any case where we
are unable to determine that the licensee is sufficiently creditworthy, we
recognize revenue only to the extent of cash collections.  When
cumulative reported royalties exceed the minimum royalty payments, the excess
royalties are recorded as revenue when collected and are referred to as
“overages”.




Revenues
related to the licensing of animation are recorded in accordance with AICPA
Statement of Position 00-2, “Accounting by Producers or Distributors of
Films.”  Under this Statement of Position, revenue is recognized when
persuasive evidence of a sale or licensing arrangement with a customer exists,
when an episode is delivered in accordance with the terms of the arrangement,
when the license period of the arrangement has begun and the customer can begin
its exhibition, when the arrangement fee is fixed or determinable, and when
collection of the arrangement fee is reasonably assured.




Allowance
for Doubtful Accounts




We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. In evaluating the
collectibility of accounts receivable, we consider a number of factors,
including the age of the accounts, changes in status of the customers’ financial
condition and other relevant factors. Estimates of uncollectible amounts are
revised each period, and changes are recorded in the period they become
known.




Excess
and Obsolete Inventory




We write
down excess and obsolete inventory to its estimated realizable 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.




Molds
and Tools




Molds and
tools are stated at cost less accumulated amortization.  For financial
reporting purposes, amortization is computed using the straight-line method over
the estimated selling life of related products.




37
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Product
and Package Design Costs




Product
and package design costs are stated at cost less accumulated
amortization.  For financial reporting purposes, amortization of
product and package design is computed using the straight-line method over the
estimated selling life of related products.




Fixed
Assets




Fixed
assets are stated at cost less accumulated depreciation and amortization. For
financial reporting purposes, depreciation and amortization is computed using
the straight-line method generally over a three to five-year life for furniture
and fixtures and office equipment, and over the shorter of the life of the
underlying lease or estimated useful life for leasehold improvements.
Expenditures for major software purchases and software developed for internal
use are capitalized and depreciated using the straight-line method over the
estimated useful lives of the related assets, which is generally 3 years. For
software developed for internal use, all external direct costs for materials and
services are capitalized in accordance with AICPA Statement of Position (SOP)
98-1, “Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.”




Film
Production Operations




Film
Inventory




In
general, we are responsible for all of the costs of developing and producing our
feature films.  The film’s distributor is responsible for the
out-of-pocket costs, charges and expenses (including contingent compensation and
residual costs, to a defined limit) incurred in the distribution, manufacturing,
printing and advertising, marketing, publicizing and promotion of the film in
all media.  After remitting to us five percent of the film’s gross
receipts, the distributor is entitled to retain a fee based upon the film’s
gross receipts and to recoup all of its costs on a film-by-film basis prior to
our receiving any additional cash proceeds.  Any of the distributor’s
costs for a film that are not recouped against receipts for that film are borne
by the distributor.




In
accordance with the AICPA Statement of Position 00-2, “Accounting by Producers
or Distributors of Films” (SOP 00-2), we capitalize all direct film production
costs, such as salaries, visual effects and set construction.  Those
capitalized costs, along with capitalized overhead and capitalized interest
costs, appear on our balance sheet as an asset called film
inventory.  Capitalization of film production overhead and interest
costs commences upon completion of the initial funding requirements of the
production and ceases upon completion of the production.  Production
overhead includes allocable costs, including salaries and benefits (including
stock compensation), of individuals or departments with exclusive or significant
responsibility for the production of films.  Capitalized production
overhead does not include other selling, general and administrative
expenses.




In
accordance with SOP 00-2, we also capitalize, into film inventory, the costs of
projects in development.  Those costs consist primarily of script
development.  In the event that a film is not scheduled for production
within three years from the time of the first capitalized transaction, or if an
earlier decision is made to abandon the project, all capitalized costs will be
expensed.




Once a
film is released, in accordance with SOP 00-2, the amount of film inventory
relating to that film is amortized and included in each period’s costs of
revenue in the proportion that the film’s revenue during the period (“Current
Revenue”) bears to the film’s then-estimated total revenue over a period not to
exceed ten years (“Ultimate Revenue”).  The amount of film inventory
amortized into costs of revenue as a percentage of film revenue may vary from
period to period due to several factors, including changes in the mix of films
earning revenue, and changes in any film’s Ultimate Revenue and
costs.




38
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The first
two films under production by the Film Production segment, Iron Man and The Incredible Hulk, are
scheduled for release in May and June 2008, respectively.  As of
December 31, 2007, our Film Production segment had film inventory of $264.8
million, primarily for these productions.  In addition, for the year
ended December 31, 2007, the Film Production segment incurred $8.7 million in
selling, general and administrative expenses, consisting primarily of
non-capitalized employee compensation and the segment’s share of the expenses
associated with our California office.




Revenue




The
amount of revenue recognized from our films in any given period depends on the
timing, accuracy and sufficiency of the information we receive from our
distributors.




Revenue
from the theatrical distribution of our films in most territories will begin to
be recognized when theatrical receipts are reported to us by the film’s
distributor.  In these territories, we will recognize revenue from
each film in the amount of five percent of gross receipts and, beyond that, to
the extent that gross receipts exceed the distributor’s fee and the costs
payable by the distributor.  There are five territories in which we
have received minimum guaranties from local distributors.  In those
territories, we will begin to recognize revenue when the film is available for
exhibition in theaters.




Revenue
from the sale of home video units will be recognized when video sales to
customers are reported by our distributors.  We will follow the
practice of providing for future returns of home entertainment product at the
time the products are sold.  We will calculate an estimate of future
returns of product by analyzing a combination of our distributors’ historical
returns, our distributors’ estimates of returns of our home video units, current
economic trends, projections of consumer demand for our home video units and
point-of-sale data available from retailers.  Based on this
information, a percentage of each sale will be reserved for possible returns,
provided that the customer has the right of return.  Generally,
customer payment terms are expected to be within 90 days from the end of the
month in which the product will be shipped.  Actual returns will be
charged against the reserve.




Revenue
from both free and pay television licensing agreements will be recognized at the
time the production is made available for exhibition in those
markets.




Changes
in estimates of future Ultimate Revenues from feature films could result in the
write-off or the acceleration of the amortization of film
inventory.  Unamortized film inventory is evaluated for impairment
each reporting period on a film-by-film basis.  If estimated remaining
revenue is not sufficient to recover the unamortized film inventory, the
unamortized film inventory will be written down to fair value.  In any
given quarter, if the Film Production segment lowers its forecast of Ultimate
Revenue for any individual film, we will accelerate the amortization of the film
inventory related to that film.




Goodwill




We have
significant goodwill on our balance sheet, which resulted from the acquisition
of Marvel Entertainment Group, Inc. in 1998.  It is accounted for
under the Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill
and Other Intangible Assets” (“SFAS 142”).  We assess the fair value
and recoverability of our long-lived assets, including goodwill, as part of our
annual impairment test and also 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 goodwill
may not be recoverable, we measure any impairment based upon a forecasted
discounted cash flow method.




39
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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.
Our assets are tested and reviewed for impairment on an ongoing basis under the
established accounting guidelines.




Licensed-in
Toy Royalties




We enter
into licensing agreements for the right to use third-party intellectual property
in our Toy segment operations, which often contain minimum royalty payment
obligations.  Prepaid minimum royalty obligations are expensed based
on sales of related products.  The realizability of prepaid minimum
royalties is evaluated by us based on the projected sales of the related
products.  We record impairment losses on prepaid minimum royalties
when events and circumstances indicate that the royalty applicable to forecasted
sales will not be sufficient to recover the prepaid minimum
royalty.




Studio
and Talent Share of Royalties




We share
merchandise licensing revenues with movie studio licensees for Marvel characters
portrayed in theatrical releases.  Typically, the studio is paid up to
50% of the total license income derived from licensing for a specific character,
in most cases net of a distribution fee retained by us, and in some instances
with adjustments for characters that have generated sales prior to the
theatrical release. In accounting for amounts payable to studios under
multi-character licensing agreements, we make an initial estimate of how minimum
guarantees recognized as revenue will be shared among the various
studios.  This estimate is subsequently adjusted based on actual
royalties reported to us by our licensees.  We also share merchandise
licensing revenue with talent for the use of their likeness in licensed
products.  We accrue our obligation to talent based upon the talent’s
participation rate as stated, the underlying arrangement between our studio
licensee and talent and the sales/royalty information for licensed products
which use the talent likeness.




Accounting
for Joint Venture




We are
party to the Joint Venture with Sony Pictures to pursue licensing opportunities
relating to characters based upon movies or television shows featuring
Spider-Man and produced by Sony Pictures.  The operations of the Joint
Venture are included in our Licensing segment.




The
operations of the Joint Venture have been consolidated in our financial
statements, including revenues of $122.0 million, $4.1 million and $24.7 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.  The Joint Venture distributes to us and to Sony
Pictures all cash received, proportionate to each party’s interest, on at least
a quarterly basis.  At December 31, 2007, we had $0.6 million in
minority interest distributions due to Sony Pictures.  At December 31,
2006, advances to joint venture partner of $8.5 million reflects distributions
made to Sony Pictures in connection with cash received by the Joint Venture from
minimum royalty advances on licensing contracts for which the Joint Venture has
not yet recognized revenue and earnings thereon.  These advances or
payments due are classified as current or non-current consistent with the
classification of deferred revenue related to such advances, which is, based on
when the underlying deferred revenue is scheduled to be recognized.




40
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Pension




In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and recognize changes in the funded status in the year in which the
changes occur.  SFAS 158 also eliminates the option to use an
early measurement date effective for fiscal years ending after December 15,
2008.  We adopted the recognition provisions of SFAS 158 effective
December 31, 2006 and early adopted the measurement provision in the first
quarter of 2007.  The impact of this adoption was minimal as a result
of our already reporting our unfunded obligation related to the Fleer/Skybox
Plan (as defined in Note 11), a frozen plan, as a liability in the statement of
financial position.




Accounting
for Stock-Based Compensation




Effective
January 1, 2006, we adopted the provisions SFAS No. 123(R)
“Share-Based Payment” (“SFAS 123R”), which establishes accounting for
equity instruments exchanged for employee services. Under the provisions of
SFAS 123R, share-based compensation cost is measured at the grant date,
based on the calculated fair value of the award, and is recognized as an expense
over the employee’s requisite service period (generally the vesting period of
the equity grant).  SFAS No. 123R also requires the related
excess tax benefit received upon exercise of stock options or vesting of
restricted stock, if any, to be reflected in the statement of cash flows as a
financing activity rather than an operating activity. In connection with the
implementation of SFAS No. 123R, we elected the short-cut method in
determining our additional paid-in capital pool of windfall benefits and the
graded vesting method to amortize compensation expense over the service
period.




We did
not grant any stock option awards during 2007 or 2006.  During the years
ended December 31, 2007 and 2006, we recognized $2.3 million and $5.9
million, respectively, of compensation expense associated with previously
granted stock options, which was classified in selling, general and
administrative expense.  The charge for the year ended December 31, 2007
and 2006, net of income tax benefit of $0.9 million and $2.3 million,
respectively, has reduced basic and diluted earnings per share by $0.02 and
$0.04, respectively.  The tax benefit to be realized from stock-based
compensation totals $2.5 million and $64.8 million (due to higher than
usual stock option exercises) for the years ended December 31, 2007 and 2006,
respectively.  During 2005, which precedes the adoption of SFAS 123R,
options granted with exercise prices at fair value on the dates of grant
resulted in no charge to compensation expense in 2005.




As of
December 31, 2007, all of our issued stock options have vested and, accordingly,
we have no remaining unrecognized compensation cost related to nonvested stock
option awards as of December 31, 2007.  As of December 31, 2006,
unrecognized compensation costs related to nonvested stock option awards was
$2.3 million.




We used
the Black-Scholes option pricing model to value the compensation expense
associated with our stock option awards under SFAS 123R.  In addition,
we estimated forfeitures when recognizing compensation expense associated with
our stock options, and adjusted our estimate of forfeitures when they were
expected to differ.  Key input assumptions used to estimate the fair
value of stock options included the market value of the underlying shares at the
date of grant, the exercise price of the award, the expected option term, the
expected volatility (based on historical volatility) of our stock over the
option’s expected term, the risk-free interest rate over the option’s expected
term, and our expected annual dividend yield.




The
Black-Scholes option pricing model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, the option valuation model requires the input of
highly subjective assumptions. Because our employee stock options have
characteristics significantly different from those of 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 measure of the fair value of our employee stock
options.




41
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Commitments
and Contingencies




On March
15, 2007, Stan Lee Media, Inc. (“SLM”) commenced an action against us in the
United States District Court for the Southern District of New
York.  The complaint alleges that SLM is the owner of intellectual
property rights in characters co-created by Stan Lee between 1941 and 1968 (the
“Creations”) while Mr. Lee was employed by our predecessors.  SLM
alleges that prior to the date Mr. Lee entered into a new employment agreement
with us in 1998, Mr. Lee transferred his interest in those characters to a
predecessor of SLM.  Mr. Lee has denied that any such transfer took
place.  Mr. Lee has an action pending in the United States District
Court for the Central District of California against the individuals acting as
the management of SLM, which asserts that any characters Mr. Lee co-created for
us or our predecessors were owned and continue to be owned by us and that those
individuals have no authority to take any actions in the name of
SLM.  The complaint in SLM’s action against us seeks a
declaration of SLM’s rights in the Creations, an accounting of the profits we
have made based on the Creations, the imposition of a constructive trust and
damages.  We believe SLM’s action to be without merit.




On March
30, 2007, Gary Friedrich and Gary Friedrich Enterprises, Inc. (“Friedrich”)
commenced a suit in the United States District Court for the Southern District
of Illinois against us and numerous other defendants including Sony Pictures
Entertainment, Inc. Columbia Pictures Industries, Inc., Hasbro, Inc. and
Take-Two Interactive Software, Inc.  That suit has been transferred to
the Southern District of New York.  The complaint alleges that
Friedrich is the owner of intellectual property rights in the character Ghost
Rider and that we and other defendants have exploited the Ghost Rider character
in a motion picture and merchandise without Friedrich’s
consent.  Friedrich has asserted numerous claims including copyright
infringement, negligence, waste, state law misappropriation, conversion,
trespass to chattels, unjust enrichment, tortious interference with right of
publicity, and for an accounting.  We believe Friedrich’s claims to be
without merit.




We are
also involved in various other legal proceedings and claims incident to the
normal conduct of our business.  Although it is impossible to predict
the outcome of any legal proceeding and there can be no assurances, we believe
that our legal proceedings and claims, individually and in the aggregate, are
not likely to have a material adverse effect on our financial condition, results
of operations or cash flows.




We
regularly evaluate our litigation claims to provide assurance that all losses
and disclosures are provided for in accordance with SFAS No. 5 “Accounting
for Contingencies” (“SFAS 5”).   Our evaluation of legal
matters involves considerable judgment of management. We engage 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 5.




Income
Taxes




We use
the liability method of accounting for income taxes as prescribed by Financial
Accounting Standard No. 109, Accounting for Income Taxes (FAS 109). 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 enacted tax rates and laws that are expected to be in effect when
the differences reverse.




Income
tax expense includes U.S. federal, state and local, 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.




We are
not responsible for the income taxes related to the minority share of the Joint
Venture’s earnings.  The tax liability associated with the
minority share of the Joint Venture’s earnings is therefore not reported in
our income tax expense, even though the Joint Venture’s entire income is
consolidated in our reported income before income tax expense.  Joint
Venture earnings therefore have the effect of lowering our effective tax rate.
 This effect is more pronounced in periods in which Joint Venture earnings
are higher relative to our other earnings.




We
consider future taxable income and potential tax planning strategies in
assessing the potential need for valuation allowances against deferred tax
assets.  If actual results differ from estimates or if we adjust these
assumptions in the future, we may need to adjust our deferred tax assets or
liabilities, which could impact our effective tax rate in future
periods.




42
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On
January 1, 2007, we adopted the provisions of FIN 48, which clarifies
accounting for uncertainty in income tax positions. This interpretation requires
us to recognize in the consolidated financial statements only those tax
positions determined to be more likely than not of being sustained upon
examination, based on the technical merits of the positions under the
presumption that the taxing authorities have full knowledge of all relevant
facts (see Note 8).  The determination of which tax positions are more
likely than not of being sustained requires the use of significant judgments and
estimates by management, which may or may not be borne out by actual
results.




Recent
Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 (our fiscal year
beginning January 1, 2008), and interim periods within those fiscal
years.  We are currently evaluating the effect of this Statement on
our consolidated financial statements.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment to FASB
Statement No. 115” (“SFAS 159”).  This standard permits entities
to choose to measure many financial instruments and certain other items at fair
value and is effective for the first fiscal year beginning after
November 15, 2007, which is our 2008 fiscal year. We are currently
evaluating the effect of this Statement on our consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” ("SFAS 141R").  SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, the
goodwill acquired and any noncontrolling interest in the
acquiree.  This statement also establishes disclosure requirements to
enable the evaluation of the nature and financial effect of the business
combination.  SFAS 141R is effective for fiscal years beginning after
December 15, 2008.  We are currently evaluating the effect of this
Statement on our consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51," (“SFAS
160”).  SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.  We are currently evaluating the effect of
this Statement on our consolidated financial statements.







ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK




We have
operations in Hong Kong and in London, England. In the normal course of
business, these operations are exposed to fluctuations in currency values. Some
of our international licenses are denominated in other currencies which subjects
us to additional currency fluctuation risks.  Management believes that
the impact of currency fluctuations do not represent a significant risk in the
context of our current international operations.  Except as noted
below, we do not generally enter into derivative financial instruments in the
normal course of business to mitigate our risk in connection with fluctuations
in currency value, nor are such instruments used for speculative
purposes.





With
respect to film production activities outside the United States, we attempt to
mitigate the effect of currency fluctuations on our production costs through the
use of forward currency contracts.  In connection with our Canadian
production activities for The
Incredible Hulk, we have entered into forward currency contracts to
mitigate our exposure to fluctuations in the value of the Canadian
dollar.  Their were no open forward currency contracts at December 31,
2007.




43
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In
connection with our film facility, we entered into an interest rate cap to cover
approximately 80% of the notional amount of anticipated borrowings under this
facility, to mitigate our exposure to rising interest rates based on
LIBOR.  We do not generally enter into any other types of derivative
financial instruments in the normal course of business to mitigate our interest
rate risk, nor are such instruments used for speculative purposes.





Additional
information relating to our outstanding financial instruments is included in
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results
of Operations.







ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA




The
financial statements required by this item, the reports of the independent
registered public accounting firm on those financial statements and the related
required financial statement schedule appear on pages F-2 and following. See the
accompanying Index to Financial Statements and Financial Statement Schedule on
page F-1. The supplementary financial data required by Item 302 of Regulation
S-K appears in Note 14 to the December 31, 2007 Consolidated Financial
Statements.









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




Not
applicable.




ITEM 9A. CONTROLS AND
PROCEDURES




Disclosure
Controls and Procedures




Marvel’s
management has evaluated, with the participation of Marvel’s chief executive
officer and chief financial officer, the effectiveness of our disclosure
controls and procedures as of the end of 2007, the fiscal year covered by this
report.  Based on that evaluation, our chief executive officer and
chief financial officer have concluded that those controls and procedures were
effective as of the end of 2007.






Internal
Control Over Financial Reporting






Management’s Annual Report on
Internal Control Over Financial Reporting




(1)            Marvel’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting for Marvel, as that term is defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934.




(2)            The
framework used by management to evaluate the effectiveness of our internal
control over financial reporting as required by paragraph (c) of Rule 13a-15
under the Securities Exchange Act of 1934 is the framework described in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.




(3)            Marvel
management’s assessment is that our internal control over financial reporting
was effective as of the end of 2007, the fiscal year covered by this
report.




44
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(4)            PricewaterhouseCoopers
LLP, the independent registered public accounting firm that audited the
consolidated financial statements and financial statement schedule included in
this annual report, has also audited the effectiveness of our internal control
over financial reporting as of December 31, 2007, as stated in their report
included in this annual report.






Attestation
Report of the Independent Registered Public Accounting Firm




The
report of PricewaterhouseCoopers LLP referred to immediately above is provided
on page F-2 below.




Changes
in Internal Controls Over Financial Reporting




There
were no changes in our internal control over financial reporting identified by
Marvel that occurred during the fourth quarter of 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




PART
III




ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE




The
information required by Item 10 is incorporated in this annual report by
reference to the information appearing under the captions “Corporate
Governance,” “Executive Officers” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in our definitive proxy statement, which we intend to file
not later than April 29, 2008, with the Securities and Exchange
Commission.




ITEM 11. EXECUTIVE
COMPENSATION




The
information required by Item 11 is incorporated in this annual report by
reference to the information appearing under the caption “Executive
Compensation” in our definitive proxy statement, which we intend to file not
later than April 29, 2008, with the Securities and Exchange
Commission.




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




The
information required by Item 12 is incorporated in this annual report by
reference to the information appearing under the caption “Security Ownership of
Certain Beneficial Owners and Management” in our definitive proxy statement,
which we intend to file not later than April 29, 2008, with the Securities and
Exchange Commission.




ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE




The
information required by Item 13 is incorporated in this annual report by
reference to the information appearing under the caption “Transactions with
Related Persons, Promoters and Certain Control Persons” and “Corporate
Governance” in our definitive proxy statement, which we intend to file not later
than April 29, 2008, with the Securities and Exchange Commission.




ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES




The
information required by Item 14 is incorporated in this annual report by
reference to the information appearing under the caption “Independent Registered
Public Accounting Firm” in our definitive proxy statement, which we intend to
file not later than April 29, 2008, with the Securities and Exchange
Commission.




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PART
IV




ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES




All financial statements and financial
statement schedules filed with this report are listed on page
F-1.  All required exhibits are listed on the Exhibit Index
immediately below.







EXHIBIT
INDEX





Exhibit
No.





3(i)
            Restated
      Certificate of Incorporation.  (Incorporated by reference to
      Exhibit 3(i) of the Company’s Current Report on Form 8-K dated February
      23, 2006 and filed with the Securities and Exchange Commission on March 1,
      2006.)3(ii)
            Amended
      and Restated Bylaws, as amended through the date hereof. (Incorporated by
      reference to Exhibit 3(ii) of the Company's Annual Report on Form
      10-K for the year ended December 31, 2003.)4.1
            Article
      V of the Restated Certificate of Incorporation (see Exhibit 3(i), above),
      defining the rights of holders of Common Stock.4.2
            Rights
      Agreement, dated as of August 22, 2000, between the Company and American
      Stock Transfer & Trust Company as Rights Agent, defining the rights of
      holders of Preferred Share Purchase Rights.  (Incorporated by
      reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated
      August 22, 2000 and filed with the Securities and Exchange Commission on
      September 12, 2000.)4.3
            Amendment
      to Rights Agreement, dated as of November 30, 2001, by and between the
      Company and American Stock Transfer & Trust Company as Rights
      Agent.  (Incorporated by reference to Exhibit 10.9 of the
      Company's Current Report on Form 8-K dated and filed with the Securities
      and Exchange Commission on December 4, 2001.)4.4
            Amendment
      No. 2 to Rights Agreement, dated as of October 7, 2002, by and between the
      Company and American Stock Transfer & Trust Company as Rights
      Agent.  (Incorporated by reference to Exhibit 10.1 of the
      Company's Current Report on Form 8-K dated October 4, 2002 and filed with
      the Securities and Exchange Commission on October 7, 2002.)10.1
            1998
      Stock Incentive Plan, as amended.  (Incorporated by reference to
      Exhibit 10.1 of the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006.)*10.2
            2005
      Stock Incentive Plan, as amended. (Incorporated by reference to Exhibit
      10.2 of the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.)*10.3
            Form
      of Stock Option Agreement under the 2005 Stock Incentive Plan.
      (Incorporated by reference to Exhibit 10.2 of the Company's Current
      Report on Form 8-K dated and filed with the Securities and Exchange
      Commission on May 4, 2005.)*10.4
            Form
      of Restricted Stock Agreement under the 2005 Stock Incentive Plan.
      (Incorporated by reference to Exhibit 10.3 of the Company's Current Report
      on Form 8-K dated and filed with the Securities and Exchange Commission on
      May 4, 2005.)*10.5
            Form
      of Performance-Based Restricted Stock Agreement under the 2005 Stock
      Incentive Plan. (Incorporated by reference to Exhibit 10.4 of the
      Company's Current Report on Form 8-K dated and filed with the Securities
      and Exchange Commission on May 4, 2005.)*




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10.6
            Form
      of Performance-Based Phantom Stock Agreement under the Company's 2005
      Stock Incentive Plan.  (Incorporated by reference to Exhibit
      10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005 and filed with the Securities and Exchange Commission
      on November 9, 2005.)*10.7
            2005
      Cash Incentive Compensation Plan, as amended.  (Incorporated by
      reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2006.)*


10.8
            Form
      of Performance-Based Award Letter under the Company's 2005 Cash Incentive
      Plan. (Incorporated  by reference to Exhibit 10.3 of the
      Company’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 2005 and filed with the Securities and Exchange Commission on November
      9, 2005.)*10.9
            Nonqualified
      Stock Option Agreement, dated as of November 30, 2001, by and between the
      Company andIsaac
      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.)*10.10
            Registration
      Rights Agreement, dated as of October 1, 1998, by and among the Company,
      Dickstein & Co., L.P., Dickstein Focus Fund L.P., Dickstein
      International Limited, Elyssa Dickstein, Jeffrey Schwarz and Alan Cooper
      as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, Mark Dickstein and
      Elyssa Dickstein, as Trustees of the Mark and Elyssa Dickstein Foundation,
      Elyssa Dickstein, Object Trading Corp., Whippoorwill/Marvel Obligations
      Trust - 1997, and Whippoorwill Associates, Incorporated. (Incorporated by
      reference to Exhibit 99.5 to the Company’s Current Report on Form 8-K/A
      dated and filed with the Securities and Exchange Commission on October 16,
      1998.)*10.11
            Registration
      Rights Agreement, dated as of December 8, 1998, by and among the Company,
      Marvel Entertainment Group, Inc., Avi Arad, Isaac Perlmutter, Isaac
      Perlmutter T.A., The Laura & Isaac Perlmutter Foundation Inc., and Zib
      Inc.  (Incorporated by reference to Exhibit 10.4 of the
      Company’s Annual Report on Form 10-K for the year ended December 31,
      1998.)*10.12
            Warrant
      Shares Registration Right Agreement, dated as of November 30, 2001, by and
      between the Company and Isaac Perlmutter.  (Incorporated by
      reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
      dated and filed with the Securities and Exchange Commission on December 4,
      2001.)*10.13
            Agreement
      of Sublease dated as of August 5, 2004, by and between CIBC World Markets
      Corp. and the Company.  (Incorporated by reference to Exhibit
      10.16 of the Company’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2004 and filed with the Securities and Exchange
      Commission on March 9, 2005.)10.14
            Amendment
      to Agreement of Sublease dated as of February 17, 2005, by and between
      CIBC World Markets Corp. and the Company.  (Incorporated by
      reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K for
      the fiscal year ended December 31, 2004 and filed with the Securities and
      Exchange Commission on March 9, 2005.)10.15
            Lease
      Agreement, dated as of February 15, 2005, by and between 417 Fifth Avenue
      LLC and the Company
              (Incorporated
      by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 2004 and filed with the Securities
      and Exchange Commission on March 9, 2005.)10.16
            Letter
      of Termination dated August 4, 2005 between HSBC Bank USA, N.A. and the
      Company. (Incorporated by reference to Exhibit 10.9 of the Company's
      Current Report on Form 8-K dated and filed with the Securities and
      Exchange Commission on September 6, 2005.)10.17
            Credit
      Agreement, dated as of November 9, 2005 among Marvel Entertainment, Inc.
      and HSBC Bank USA, National Association.  (Incorporated by
      reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q
      for the quarter ended September 30, 2005 and filed with the Securities and
      Exchange Commission on November 9, 2005.)




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10.18
            Amendment
      No. 1 and Reaffirmation Agreement dated as of January 18, 2006 to Credit
      Agreement dated as of November 9, 2005, among the Company and HSBC Bank
      USA, National Association.  (Incorporated by reference to
      Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2006 and filed with the Securities and Exchange
      Commission on August 8, 2006.)


10.19
            Amendment
      No. 2 and Reaffirmation Agreement dated as of June 28, 2006 to Credit
      Agreement dated as of November 9, 2005, among the Company and HSBC Bank
      USA, National Association.  (Incorporated by reference to
      Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2006 and filed with the Securities and Exchange
      Commission on August 8, 2006.)10.20
            Amendment
      No. 3 and Reaffirmation Agreement dated as of June 30, 2006 to Credit
      Agreement dated as of November 9, 2005, among the Company and HSBC Bank
      USA, National Association.  (Incorporated by reference to
      Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2006 and filed with the Securities and Exchange
      Commission on August 8, 2006.)10.21
            Amendment
      No. 4 and Reaffirmation Agreement dated as of May 7, 2007 to
      Credit Agreement dated as of November 9, 2005, between Marvel
      Entertainment, Inc. and HSBC Bank USA, National Association.
      (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
      Report on Form 10-Q for the quarter ended March 31, 2007 and filed with
      the Securities and Exchange Commission on May 9, 2007.)10.22
            Amendment
      No. 5 and Reaffirmation Agreement dated as of August 21, 2007 by and among
      the Registrant, Marvel Characters, Inc. and HSBC Bank USA, National
      Association.  (Incorporated by reference to Exhibit 10.1 of
      the Company's Current Report on Form 8-K dated August 21, 2007 and filed
      with the Securities and Exchange Commission on August 27,
      2007.)10.23
            Pledge
      and Security Agreement, dated as of November 9, 2005, by Marvel
      Entertainment, Inc.  and Marvel Characters, Inc. in favor of
      HSBC Bank USA, National Association. (Incorporated by reference to Exhibit
      10.6 of the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005 and filed with the Securities and Exchange Commission
      on November 9, 2005.)10.24
            Guaranty,
      dated as of November 9, 2005 by Marvel Characters, Inc. in favor of and
      for the benefit of HSBC Bank USA, National
      Association.  (Incorporated by reference to Exhibit 10.7 of the
      Company’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 2005 and filed with the Securities and Exchange Commission on November
      9, 2005.)10.25
            Credit
      and Security Agreement, dated as of August 31, 2005, by and among MVL Film
      Finance LLC, as Borrower, the Financial Institutions and Conduit Lenders
      identified therein, as Lenders, HSBC Bank USA, National Association, as
      the Collateral Agent and General Electric Capital Corporation, as
      Administrative Agent.  (Incorporated by reference to Exhibit
      10.1 of the Company's Current Report on Form 8-K dated and filed with the
      Securities and Exchange Commission on September 6, 2005.)10.26
            Insurance
      and Indemnity Agreement, dated as of August 31, 2005, by and between the
      Company, MVL Film Finance LLC, MVL Productions LLC, MVL Rights LLC, Marvel
      Studios, Inc.,the
      Collateral Agent and Ambac Assurance Corporation.  (Incorporated
      by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K
      dated and filed with the Securities and Exchange Commission on September
      6, 2005.)10.27
            Amendment
      No. 1 dated as of September 29, 2006 to Transaction Documents by and among
      MVL Film Finance LLC, MVL Productions LLC, Marvel Studios, Inc., Marvel
      Characters, Inc., MVL Rights LLC, Ambac Assurance Corporation and HSBC
      Bank USA, National Association. (Incorporated by reference to Exhibit 10.1
      of the Company's Current Report on Form 8-K dated September 29, 2006
      and filed with the Securities and Exchange Commission on October 5,
      2006.)




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10.28
            Amendment
      No. 2 dated as of February 21, 2007 to Transaction Documents by and among
      MVL Film Finance LLC, MVL Productions LLC, Marvel Studios, Inc., Marvel
      Characters, Inc., MVL Rights LLC, Ambac Assurance Corporation and HSBC
      Bank USA, National Association.  (Incorporated by reference to
      Exhibit 10.26 of the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006.)


10.29
            Amendment
      No. 3 to Transaction Documents dated as of April 13, 2007 by and among
      HSBC Bank USA, National Association, in its capacity as Collateral Agent,
      Ambac Assurance Corporation, in its capacity as Control Party, MVL
      Productions LLC, Marvel Studios, Inc. and MVL Film Finance
      LLC.  (Incorporated by reference to Exhibit 10.1 of the
      Company's Current Report on Form 8-K dated April 16, 2007 and filed
      with the Securities and Exchange Commission on April 19,
      2007.)10.30
            Amendment
      No. 4 dated as of January 15, 2008 to Transaction Documents by and among
      MVL Film Finance LLC, MVL Productions LLC, Marvel Studios, Inc. and Ambac
      Assurance Corporation, in its capacity as Control Party.  (Filed
      herewith.)10.31
            Amended
      and Restated Studio Distribution Agreement, dated as of August 31, 2005,
      by and between MVL Productions LLC and Paramount Pictures
      Corporation.  (Incorporated by reference to Exhibit 10.1 of the
      Company’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 2005 and filed with the Securities and Exchange Commission on November
      9, 2005.)10.32
            Master
      Development and Distribution Agreement, dated as of August 31, 2005, by
      and among MVL Film Finance LLC, MVL Productions LLC and Marvel Studios,
      Inc.  (Incorporated by reference to Exhibit 10.3 of the
      Company's Current Report on Form 8-K dated and filed with the Securities
      and Exchange Commission on September 6, 2005.)10.33
            Assignment
      Agreement, dated as of August 31, 2005, by and between Marvel Characters,
      Inc. and MVL Rights LLC.  (Incorporated by reference to Exhibit
      10.4 of the Company's Current Report on Form 8-K dated and filed with the
      Securities and Exchange Commission on September 6, 2005.)10.34
            Exclusive
      Cross License Agreement, dated as of August 31, 2005, by and between MVL
      Rights LLC and MVL Film Finance LLC.  (Incorporated by reference
      to Exhibit 10.5 of the Company's Current Report on Form 8-K dated and
      filed with the Securities and Exchange Commission on September 6,
      2005.)10.35
            Hulk
      Exclusive Cross License Agreement dated as of September 29, 2006 by and
      between MVL Rights LLC and MVL Film Finance LLC. (Incorporated by
      reference to Exhibit 10.2 of the Company's Current Report on Form 8-K
      dated September 29, 2006 and filed with the Securities and Exchange
      Commission on October 5, 2006.)10.36
            Iron
      Man Exclusive Cross License Agreement dated as of September 29, 2006 by
      and between MVL Rights LLC and MVL Film Finance LLC. (Incorporated by
      reference to Exhibit 10.3 of the Company's Current Report on Form 8-K
      dated September 29, 2006 and filed with the Securities and Exchange
      Commission on October 5, 2006.)10.37
            Exclusive
      License Agreement, dated as of August 31, 2005, by and between MVL Rights
      LLC and Marvel Characters, Inc.  (Incorporated by reference to
      Exhibit 10.6 of the Company's Current Report on Form 8-K dated and filed
      with the Securities and Exchange Commission on September 6,
      2005.)10.38
            Letter
      Agreement, dated as of August 31, 2005, by Marvel and agreed and
      acknowledged by Marvel Studios, Inc., MVL Rights LLC, MVL Productions LLC
      and Marvel Characters, Inc.  (Incorporated by reference to
      Exhibit 10.7 of the Company's Current Report on Form 8-K dated and filed
      with the Securities and Exchange Commission on September 6,
      2005.)10.39
            Assignment
      Agreement, dated as of August 30, 2005, by and between Marvel, Marvel
      Entertainment Group, Inc. and Marvel Characters, Inc. (Incorporated by
      reference to Exhibit 10.8 of the Company's Current Report on Form 8-K
      dated and filed with the Securities and Exchange Commission on September
      6, 2005.)




49
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10.40
            License
      Agreement dated January 6, 2006 by and between Marvel Characters, Inc. and
      Spider-Man Merchandising L.P. on the one hand, and Hasbro, Inc. on the
      other.  (Incorporated by reference to Exhibit 10.1 of the
      Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
      2006 and filed with the Securities and Exchange Commission on May 8,
      2006.)10.41
            Amendment
      dated as of February 8, 2006 to License Agreement dated January 6, 2006 by
      and between Marvel Characters, Inc. and Spider-Man Merchandising L.P. on
      the one hand, and Hasbro, Inc. on the other.  (Incorporated by
      reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q
      for the quarter ended March 31, 2006 and filed with the Securities and
      Exchange Commission on May 8, 2006.)10.42
            Employment
      Agreement, dated as of November 30, 1998, between the Company and Stan
      Lee. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
      Report on Form 10-Q for the quarter ended September 30,
      2002.)*10.43
            Employment
      Agreement dated May 31, 2007 between the Company and Alan
      Fine.  (Incorporated by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2007.)*10.44
            Amendment
      No. 1, dated as of August 6, 2007, to Employment Agreement dated May 31,
      2007 between the Company and Alan Fine.  (Incorporated by
      reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2007.)*10.45
            Employment
      Agreement, dated as of March 13, 2006, by and between the Company and John
      Turitzin.  (Incorporated by reference to Exhibit 10.35 of the
      Company's Annual Report on Form 10-K for the year ended December 31,
      2005.)*10.46
            Amendment
      No. 1, dated as of August 6, 2007, to Employment Agreement between the
      Company and John Turitzin.  (Incorporated by reference to
      Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2007.)*10.47
            Employment
      Agreement, dated as of May 3, 2005, by and between the Company and David
      Maisel.  (Incorporated by reference to Exhibit 10.7 of the
      Company's Current Report on Form 8-K dated April 28, 2005 and filed with
      the Securities and Exchange Commission on May 4, 2005.)*10.48
            Amendment
      No. 1, dated as of September 28, 2005, to the Employment Agreement, dated
      as of May 3, 2005, between the Company and David
      Maisel.  (Incorporated by reference to Exhibit 10.1 of the
      Company's Current Report on Form 8-K dated September 28, 2005 and filed
      with the Securities and Exchange Commission on September 29,
      2005.)*10.49
            Employment
      Agreement dated June 20, 2007 between the Company and Kenneth P.
      West.  (Incorporated by reference to Exhibit 10.2 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2007.)*10.50
            Employment
      Agreement, dated as of November 30, 2001, by and between the Company and
      Isaac Perlmutter.  (Incorporated by reference to Exhibit 10.6 to
      the Company’s Current Report on Form 8-K dated and filed with the
      Securities and Exchange Commission on December 4, 2001.)*10.51
            Amendment
      to Employment Agreement with Isaac Perlmutter dated as of May 1,
      2004.  (Incorporated by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2004.)*10.52
            Second
      Amendment to Employment Agreement with Isaac Perlmutter dated as of
      October 15, 2004.  (Incorporated by reference to Exhibit 10.2 to
      the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2004.)*




50
 TOC


10.53
            Third
      Amendment to Employment Agreement with Isaac Perlmutter dated as of May 8,
      2006.  (Incorporated by reference to Exhibit 10.4 of the
      Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
      2006 and filed with the Securities and Exchange Commission on May 8,
      2006.)*10.54
            Share
      Disposition Agreement, dated as of November 8, 2005 by and between Marvel
      Entertainment, Inc. and Isaac Perlmutter.  (Incorporated by
      reference to Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q
      for the quarter ended September 30, 2005 and filed with the Securities and
      Exchange Commission on November 9, 2005.)*10.55
            Share
      Disposition Agreement, dated as of May 2, 2006 by and between Marvel
      Entertainment, Inc. and Isaac Perlmutter.  (Incorporated by
      reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q
      for the quarter ended March 31, 2006 and filed with the Securities and
      Exchange Commission on May 8, 2006.)*10.56
            Share
      Disposition Agreement, dated as of June 2, 2006 by and between Marvel
      Entertainment, Inc. and Isaac Perlmutter.  (Incorporated by
      reference to Exhibit 10.2 of the Company's Current Report on Form 8-K
      dated May 30, 2006 and filed with the Securities and Exchange Commission
      on June 5, 2006.)*10.57
            Share
      Disposition Agreement, dated as of May 20, 2007 by and between Marvel
      Entertainment, Inc. and Isaac Perlmutter.  (Incorporated by
      reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2007.)*10.58
            Share
      Disposition Agreement, dated as of February 13, 2008 by and between Marvel
      Entertainment, Inc. and Isaac Perlmutter.  (Incorporated by
      reference to Exhibit 10.1 of the Company's Current Report on Form 8-K
      dated February 19, 2008 and filed with the Securities and Exchange
      Commission on February 25, 2008.)*21
            Subsidiaries
      of the Registrant.  (Filed herewith.)23
            Consent
      of PricewaterhouseCoopers LLP.  (Filed herewith.)24
            Power
      of attorney (included below the signature hereto).31.1
            Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.  (Filed herewith.)31.2
            Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.  (Filed herewith.)32
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act.  (Furnished
      herewith.)





*Management
contract or compensatory plan or arrangement.





SIGNATURES







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







MARVEL
      ENTERTAINMENT, INC.By:
            /s/
      John TuritzinJohn
      Turitzin
              Executive
      Vice President





February
27, 2008




51
 TOC








POWER
OF ATTORNEY




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




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







Signature
            
            Title
            
            Date/s/
      Isaac Perlmutter
            
            Chief
      Executive Officer and
              Vice
      Chairman of the Board of Directors
              (principal
      executive officer)
            
            February
      27, 2008Isaac
      Perlmutter/s/
      Kenneth P. West
            
            Chief
      Financial Officer
              (principal
      financial officer)
            
            February
      27, 2008Kenneth
      P. West/s/
      Mark D. Plotkin
            
            Chief
      Accounting Officer
              (principal
      accounting officer)
            
            February
      27, 2008Mark
      D. Plotkin/s/
      Morton E. Handel
            
            Chairman
      of the Board of Directors
            
            February
      27, 2008Morton
      E. Handel/s/
      F. Peter Cuneo
            
            Vice
      Chairman of the Board of Directors
            
            February
      27, 2008F.
      Peter Cuneo/s/
      James W. Breyer
            
            Director
            
            February
      27, 2008James
      W. Breyer/s/
      Laurence N. Charney
            
            Director
            
            February
      27, 2008Laurence
      N. Charney/s/
      Sid Ganis
            
            Director
            
            February
      27, 2008Sid
      Ganis/s/
      James F. Halpin
            
            Director
            
            February
      27, 2008James
      F. Halpin/s/
      Richard Solar
            
            Director
            
            February
      27, 2008Richard
      Solar







52
 TOC










INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS




AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE







Marvel Entertainment,
      Inc.Report of Independent Registered Public Accounting
      Firm
            F-2Consolidated Balance Sheets as of December 31, 2007 and
      2006
            F-4Consolidated Statements of Net Income for the years ended
      December 31, 2007, 2006 and 2005
            F-5Consolidated Statements of Stockholders' Equity and
      Comprehensive Income for the years ended December 31, 2007, 2006 and
      2005
            F-6Consolidated Statements of Cash Flows for the years ended
      December 31, 2007, 2006, and 2005
            F-7Notes to Consolidated Financial
    Statements
            F-9Consolidated Financial
      Statement ScheduleSchedule II-Valuation and Qualifying
      Accounts
            F-42





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




















F-1
 INDEX








Reportof
Independent Registered Public Accounting Firm





To the
Board of Directors and Shareholders of Marvel Entertainment, Inc.:





In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of net income, of stockholders' equity and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Marvel Entertainment, Inc. and its subsidiariesat December 31,
2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007in conformity with
accounting principles generally accepted in the United States of
America.  In addition, in our opinion, the accompanying financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.  Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Annual Report on Internal Control Over Financial Reporting
appearing under Item 9A.  Our responsibility is to express opinions on
these financial statements, on the financial statement schedule, and on the
Company's internal control over financial reporting based on our integrated
audits.  We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).  Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects.  Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk.  Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.





As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain tax positions in 2007 and
the manner in which it accounts for share-based compensation in
2006.





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




F-2
 INDEX





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





/s/
PricewaterhouseCoopers LLP


New York,
New York


February
27, 2008















F-3
 INDEX


MARVEL
ENTERTAINMENT, INC.





CONSOLIDATED BALANCE SHEETS





December
      31,2007
              2006(in
      thousands, except share data)ASSETSCurrent
      assets:Cash
      and cash equivalents
              $
              30,153
              
              $
              31,945Restricted
      cash
              
              20,836
              
              
              8,527Short-term
      investments
              
              21,016
              
              
              ­–Accounts
      receivable, net
              
              28,679
              
              
              59,392Inventories,
      net
              
              10,647
              
              
              10,224Income
      tax receivable
              
              10,882
              
              
              45,569Deferred
      income taxes, net
              
              21,256
              
              
              22,564Advances
      to joint venture partner
              
              –
              
              
              8,535Prepaid
      expenses and other current assets
              
              4,245
              
              
              7,231Total
      current assets
              
              147,714
              
              
              193,987Fixed
      assets, net
              
              2,612
              
              
              4,444Product
      and package design costs, net
              
              –
              
              
              1,497Film
      inventory
              
              264,817
              
              
              15,055Goodwill
              
              346,152
              
              
              341,708Accounts
      receivable, non–current portion
              
              1,300
              
              
              12,879Income
      tax receivable, non–current portion
              
              4,998
              
              
              –Deferred
      income taxes, net
              
              37,116
              
              
              36,406Deferred
      financing costs
              
              11,400
              
              
              15,771Other
      assets
              
              1,249
              
              
              2,118Total
      assets
              $
              817,358
              
              $
              623,865LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              $
              3,054
              
              $
              5,112Accrued
      royalties
              
              84,694
              
              
              68,467Accrued
      expenses and other current liabilities
              
              37,012
              
              
              38,895Deferred
      revenue
              
              88,617
              
              
              140,072Film
      facilities
              
              42,264
              
              
              –Minority
      interest to be distributed
              
              556
              
              
              –Total
      current liabilities
              
              256,197
              
              
              252,546Accrued
      royalties, non-current portion
              
              10,273
              
              
              12,860Deferred
      revenue, non-current portion
              
              58,166
              
              
              35,667Line
      of credit
              
              –
              
              
              17,000Film
      facilities, non-current portion
              
              246,862
              
              
              33,200Income
      tax payable, non-current portion
              
              54,066
              
              
              10,999Other
      liabilities
              
              10,291
              
              
              6,702Total
      liabilities
              
              635,855
              
              
              368,974Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.01 par value, 100,000,000 shares authorized, none
      issued
              
              –
              
              
              –Common
      stock, $.01 par value, 250,000,000 shares authorized, 133,179,310 issued
      and 77,624,842 outstanding in 2007 and 128,420,848 issued and 81,326,627
      outstanding in 2006
              
              1,333
              
              
              1,284Additional
      paid-in capital
              
              728,815
              
              
              710,460Retained
      earnings
              
              349,590
              
              
              228,466Accumulated
      other comprehensive loss
              
              (3,395
              )
              
              (2,433
              )Total
      stockholders’ equity before treasury stock
              
              1,076,343
              
              
              937,777Treasury
      stock, at cost, 55,554,468 shares in 2007 and 47,094,221 shares in
      2006
              
              (894,840
              )
              
              (682,886
              )Total
      stockholders’ equity
              
              181,503
              
              
              254,891Total
      liabilities and stockholders’ equity
              $
              817,358
              
              $
              623,865




See Notes to Consolidated Financial
Statements.


F-4
 INDEX


MARVEL
ENTERTAINMENT, INC.




CONSOLIDATEDSTATEMENTS OF NET INCOME




Years
      Ended December 31,2007
              
              
              2006
              
              
              2005(in
      thousands, except per share data)Net
      sales
              
              $
              485,807
              
              $
              351,798
              
              $
              390,507Costs
      and expenses:Cost
      of revenues (excluding depreciation expense)
              
              
              60,933
              
              
              103,584
              
              
              50,517Selling,
      general and administrative
              
              
              147,118
              
              
              123,130
              
              
              166,456Depreciation
      and amortization
              
              
              5,970
              
              
              14,322
              
              
              4,534Total
      costs and expenses
              
              
              214,021
              
              
              241,036
              
              
              221,507Other
      income, net
              
              
              2,643
              
              
              1,798
              
              
              2,167Operating
      income
              
              
              274,429
              
              
              112,560
              
              
              171,167Interest
      expense
              
              
              13,756
              
              
              15,225
              
              
              3,982Interest
      income
              
              
              2,559
              
              
              1,465
              
              
              3,863Income
      before income tax expense and minority interest
              
              
              263,232
              
              
              98,800
              
              
              171,048Income
      tax expense
              
              
              (98,908
              )
              
              (39,071
              )
              
              (62,820
              )Minority
      interest in consolidated joint venture
              
              
              (24,501
              )
              
              (1,025
              )
              
              (5,409
              )Net
      income
              
              $
              139,823
              
              $
              58,704
              
              $
              102,819Basic
      and diluted net income per share:Weighted
      average shares outstanding:Weighted
      average shares for basic earnings per share
              
              
              79,751
              
              
              82,161
              
              
              99,594Effect
      of dilutive stock options, warrants and restricted stock
              
              
              2,716
              
              
              5,069
              
              
              6,464Weighted
      average shares for diluted earnings per share
              
              
              82,467
              
              
              87,230
              
              
              106,058Net
      income per share:Basic
              
              $
              1.75
              
              $
              0.71
              
              $
              1.03Diluted
              
              $
              1.70
              
              $
              0.67
              
              $
              0.97





See Notes
to Consolidated Financial Statements.


F-5
 INDEX


MARVEL
ENTERTAINMENT, INC.




CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


AND
COMPREHENSIVE INCOME




Accumulated
      Other
                Comprehensive
      LossCommon
                Stock
                Shares
              
              
              Common
                Stock
                Amount
              
              
              Deferred
                Stock
                Compensation
              
              
              Additional
                Paid-In
                Capital
              
              
              Retained
                Earnings
              
              
              Foreign
                Currency
              
              
              Pension
                Liability
              
              
              Treasury
                Stock
              
              
              Total(in
      thousands)Balance
      at December 31, 2004
              
              105,102
              
              $
              1,205
              
              $
              (5,164
              )
              $
              577,169
              
              $
              66,943
              
              $
              –
              
              $
              (2,652
              )
              $
              (91,001
              )
              $
              546,500Employee
      stock options exercised
              
              1,133
              
              
              10
              
              
              –
              
              
              5,522
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              5,532Tax
      benefit of stock options exercised
              
              –
              
              
              –
              
              
              –
              
              
              7,382
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              7,382Restricted
      stock grants
              
              335
              
              
              3
              
              
              (6,654
              )
              
              6,651
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Restricted
      stock forfeited
              
              (169
              )
              
              (1
              )
              
              685
              
              
              (2,857
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (2,173
              )Treasury
      stock, at cost
              
              (16,195
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (304,535
              )
              
              (304,535
              )Amortization
      of restricted stock grants
              
              –
              
              
              –
              
              
              4,891
              
              
              (59
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              4,832Warrants
      issued for services
              
              –
              
              
              –
              
              
              –
              
              
              1,065
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              1,065Net
      income
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              102,819
              
              
              –
              
              
              –
              
              
              –
              
              
              102,819Other
      comprehensive income (loss)
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              45
              
              
              (867
              )
              
              –
              
              
              (822
              )Comprehensive
      income
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              101,997Balance
      at December 31, 2005
              
              90,206
              
              
              1,217
              
              
              (6,242
              )
              
              594,873
              
              
              169,762
              
              
              45
              
              
              (3,519
              )
              
              (395,536
              )
              
              360,600Impact
      of adoption of FAS 123R
              
              (502
              )
              
              (4
              )
              
              6,242
              
              
              (6,238
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Employee
      stock options exercised
              
              7,075
              
              
              70
              
              
              –
              
              
              46,812
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              46,882Tax
      benefit of stock options exercised
              
              –
              
              
              –
              
              
              –
              
              
              64,802
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              64,802Restricted
      stock vesting
              
              152
              
              
              1
              
              
              –
              
              
              (1
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Common
      stock retired
              
              (46
              )
              
              –
              
              
              –
              
              
              (828
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (828
              )Treasury
      stock, at cost
              
              (15,558
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (287,350
              )
              
              (287,350
              )Compensatory
      stock expense
              
              –
              
              
              –
              
              
              –
              
              
              11,040
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              11,040Net
      income
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              58,704
              
              
              –
              
              
              –
              
              
              –
              
              
              58,704Other
      comprehensive income
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              147
              
              
              894
              
              
              –
              
              
              1,041Comprehensive
      income
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              59,745Balance
      at December 31, 2006
              
              81,327
              
              
              1,284
              
              
              –
              
              
              710,460
              
              
              228,466
              
              
              192
              
              
              (2,625
              )
              
              (682,886
              )
              
              254,891Impact
      of adoption of FIN 48
              
              –
              
              
              –
              
              
              –
              
              
              265
              
              
              (18,699
              )
              
              –
              
              
              –
              
              
              –
              
              
              (18,434
              )Employee
      stock options exercised
              
              676
              
              
              8
              
              
              –
              
              
              12,052
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              12,060Tax
      benefit of stock options exercised, net
              
              –
              
              
              –
              
              
              –
              
              
              (604
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (604
              )Restricted
      stock vesting
              
              4,109
              
              
              41
              
              
              –
              
              
              (41
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Common
      stock retired
              
              (47
              )
              
              –
              
              
              –
              
              
              (1,243
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (1,243
              )Treasury
      stock, at cost
              
              (8,460
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (211,954
              )
              
              (211,954
              )Compensatory
      stock expense
              
              –
              
              
              –
              
              
              –
              
              
              7,926
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              7,926Warrants
      issued for services
              
              20
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Net
      income
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              139,823
              
              
              –
              
              
              –
              
              
              –
              
              
              139,823Other
      comprehensive income (loss)
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              150
              
              
              (1,112
              )
              
              –
              
              
              (962
              )Comprehensive
      income
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              138,861Balance
      at December 31, 2007
              
              77,625
              
              $
              1,333
              
              $
              –
              
              $
              728,815
              
              $
              349,590
              
              $
              342
              
              $
              (3,737
              )
              $
              (894,840
              )
              $
              181,503




See Notes to Consolidated Financial
Statements.


F-6
 INDEX


MARVEL
ENTERTAINMENT, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS




Years
      Ended December 31,2007
            
            2006
            
            2005(in
      thousands)Net
      income
            
            $
            139,823
            
            $
            58,704
            
            $
            102,819Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
            
            
            5,970
            
            
            14,322
            
            
            4,534Amortization
      of deferred financing charges
            
            
            4,980
            
            
            4,980
            
            
            1,660Unrealized
      loss (gain) on interest rate cap and foreign currency forward
      contracts
            
            
            915
            
            
            1,504
            
            
            (347
            )Non-cash
      charge for stock based compensation
            
            
            7,926
            
            
            11,040
            
            
            4,832Excess
      tax benefit from stock-based compensation
            
            
            (2,454
            )
            
            (45,569
            )
            
            –Tax
      benefit of stock options exercised
            
            
            ­–
            
            
            ­–
            
            
            7,382Gain
      on sales of equipment
            
            
            –
            
            
            (133
            )
            
            –Impairment
      of long term assets
            
            
            1,301
            
            
            962
            
            
            –Deferred
      income taxes
            
            
            1,161
            
            
            (300
            )
            
            (13,573
            )Minority
      interest of joint venture (net of distributions of $14,751 in 200and
      $6,071 in 2006)
            
            
            9,750
            
            
            (5,046
            )
            
            (11,917
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            42,292
            
            
            7,127
            
            
            31,896Income
      tax receivable
            
            
            30,963
            
            
            –
            
            
            –Inventories
            
            
            (423
            )
            
            (1,047
            )
            
            (2,590
            )Prepaid
      expenses and other current assets
            
            
            2,986
            
            
            (2,446
            )
            
            (2,051
            )Film
      inventory
            
            
            (251,045
            )
            
            (15,055
            )
            
            –Other
      assets
            
            
            (46
            )
            
            172
            
            
            (56
            )Deferred
      revenue
            
            
            (28,956
            )
            
            140,087
            
            
            (6,093
            )Income
      taxes payable
            
            
            17,820
            
            
            (1,296
            )
            
            2,166Accounts
      payable, accrued expenses and other current liabilities
            
            
            10,431
            
            
            (9,831
            )
            
            19,075Net
      cash (used in) provided by operating activities
            
            
            (6,606
            )
            
            158,175
            
            
            137,737Cash
      flow (used in) provided by investing activities:Payment
      of administrative claims and unsecured claims, net
            
            
            –
            
            
            –
            
            
            (50
            )Purchases
      of fixed assets
            
            
            (2,169
            )
            
            (10,034
            )
            
            (3,193
            )Expenditures
      for product and package design
            
            
            (490
            )
            
            (6,252
            )
            
            (1,096
            )Proceeds
      from sales of equipment
            
            
            –
            
            
            1,876
            
            
            –Sales
      of short–term investments
            
            
            333,380
            
            
            80,671
            
            
            442,394Purchases
      of short–term investments
            
            
            (354,396
            )
            
            (65,532
            )
            
            (302,814
            )Change
      in restricted cash
            
            
            (12,309
            )
            
            (144
            )
            
            22,514Net
      cash (used in) provided by investing activities
            
            
            (35,984
            )
            
            585
            
            
            157,755Cash
      flow provided by (used in) financing activities:Borrowings
      from  film facilities
            
            
            255,926
            
            
            7,400
            
            
            25,800Borrowings
      from line of credit
            
            
            2,000
            
            
            169,200
            
            
            ­–Repayments
      of line of credit
            
            
            (19,000
            )
            
            (152,200
            )
            
            ­–Deferred
      financing costs
            
            
            (609
            )
            
            ­–
            
            
            (24,526
            )Purchase
      of treasury stock
            
            
            (211,954
            )
            
            (287,350
            )
            
            (297,128
            )Exercise
      of stock options
            
            
            12,060
            
            
            46,882
            
            
            5,532Excess
      tax benefit from stock-based compensation
            
            
            2,454
            
            
            64,802
            
            
            ­–Net
      cash provided by (used in) financing activities
            
            
            40,877
            
            
            (151,266
            )
            
            (290,322
            )Effect
      of exchange rates on cash
            
            
            (79
            )
            
            224
            
            
            (117
            )Net
      (decrease) increase in cash and cash equivalents
            
            
            (1,792
            )
            
            7,718
            
            
            5,053Cash
      and cash equivalents, at beginning of year
            
            
            31,945
            
            
            24,227
            
            
            19,174Cash
      and cash equivalents, at end of year
            
            $
            30,153
            
            $
            31,945
            
            $
            24,227




See Notes to Consolidated Financial
Statements.


F-7
 INDEX


MARVEL
ENTERTAINMENT, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)




Years
      Ended December 31,2007
            
            
            2006
            
            
            2005(in
      thousands)Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            4,564
            
            $
            10,009
            
            $
            468Income
      taxes paid
            
            
            91,476
            
            
            38,174
            
            
            68,914Income
      tax refund
            
            
            42,064
            
            
            12,180
            
            
            –Supplemental
      disclosure of non-cash financing activities:Common
      stock warrants issued in settlement of deferred financing
      costs
            
            
            –
            
            
            –
            
            
            1,065Treasury
      stock repurchases settled in January 2006
            
            
            –
            
            
            –
            
            
            7,407





See Notes
to Consolidated Financial Statements.




F-8
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007


1.
            Description
      of Business and Basis of
Presentation




Marvel
Entertainment, Inc. and its subsidiaries are one of the world’s most prominent
character-based entertainment companies, with a proprietary library of over
5,000 characters.




We
operate in four integrated and complementary operating segments: Licensing,
Publishing, Toys and Film Production.  The expansion of our studio
operations to include feature films that we produce ourselves began in late 2005
with our entering into a $525 million film facility (the “Film Facility”) to
fund the production of our films. This expansion resulted in the creation of a
new segment, the Film Production segment, during 2006.  Previously,
Marvel Studios’ operations related solely to the licensing of our characters to
third-party motion picture and television producers.  Those licensing
activities were included, and are still included, in the Licensing segment. The
operations of developing and producing our own theatrical releases are reported
in our Film Production segment.




In
connection with the Film Facility, we formed the following wholly-owned
subsidiaries: MVL Rights LLC, MVL Productions LLC, Incredible Productions LLC,
Iron Works Productions LLC, MVL Iron Works Productions Canada, Inc., MVL
Incredible Productions Canada, Inc. and MVL Film Finance LLC (collectively, the
“Film Slate Subsidiaries”). The assets of the Film Slate Subsidiaries, other
than MVL Productions LLC, are not available to satisfy debts or other
obligations of any of our other subsidiaries or any other persons.




We are
party to a joint venture with Sony Pictures Entertainment Inc. (“Sony
Pictures”), called Spider-Man Merchandising L.P. (the “Joint Venture”), for the
purpose of pursuing licensing opportunities relating to characters based upon
movies or television shows featuring Spider-Man and produced by Sony
Pictures.  The Joint Venture is consolidated in our accompanying
financial statements as a result of our having control of all significant
decisions relating to the ordinary course of business of the Joint Venture and
receiving the majority of the financial interest of the Joint Venture. The
operations of the Joint Venture are included in our Licensing
segment.




2.
            Summary
      of Significant Accounting Policies




Principles
of Consolidation




The
consolidated financial statements include our accounts and those of our
subsidiaries, including the Film Slate Subsidiaries and the Joint Venture. Upon
consolidation, all inter-company accounts and transactions are
eliminated.




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The principal areas of judgment in our consolidated financial
statements relate to provisions for returns, other sales allowances and doubtful
accounts, the realizability of inventories, the realizability of goodwill, the
realizability of film inventory, the reserve for uncollected minimum royalty
guarantees, valuation allowances for deferred income tax assets, reserves for
uncertain tax positions, depreciation and amortization periods for equipment,
pension plan assumptions, litigation related accruals, character allocation in
computing studio share of royalties payable, and forfeiture rates related to
employee stock compensation. Actual results could differ from these
estimates.




F-9
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007




2.           Summary
of Significant Accounting Policies (continued)




Out-of-Period
Adjustments
  During
the fourth quarter of 2007, we identified an error in the amount of royalties
payable to actors for the use of their likeness in licensed products over the
period 2004 to 2006.  We corrected this error in the 2007 year-end
close process, which had the effect of increasing selling, general and
administrative expense by $6.9 million and reducing net income by $2.8 million
net of income tax benefit and the portion of the expense attributable to
minority share in Joint Venture.  We do not believe that this
adjustment is material to the consolidated financial statements for the year
ended December 31, 2007.  In addition, we do not believe that this
error is material to the consolidated financial statements for prior years and,
as a result, we have not restated our consolidated financial statements for such
years.
  During
the fourth quarter of 2005, we identified errors of $3.3 million in our 2004
consolidated income tax expense related to an accounting entry made in
connection with book and tax basis differences related to the Joint Venture as
of April 1, 2004 and the tax impact of our share of Joint Venture earnings for
the period April 1, 2004 through December 31, 2004.  We corrected
these errors in the 2005 year-end close process, which had the effect of
reducing 2005 consolidated income tax expense by $3.3 million and increasing
2005 consolidated net income by $3.3 million.  We do not believe this
adjustment is material to the consolidated financial statements for the years
ended December 31, 2005 or 2004.




Cash
and Cash Equivalents




We consider all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.We place our investments with high
quality financial institutions. At times, such investments may be in excess of
federally insured limits.




Restricted
Cash




Restricted
cash primarily consists of cash balances of the Joint Venture that are not
freely available to either Sony Pictures or us until distributed, generally on a
quarterly basis.




Restricted
cash also includes cash held in The Incredible Hulk film
production bank accounts, which may only be used for the production of this film
as well as cash that has been pledged to secure the film facility and is not
available for our general corporate purposes (see Note 4).




Short-Term
Investments




At
December 31, 2007, we held $21.0 million of short-term investments, which
consists of $17.0 million US Treasury Bills and $4.0 million auction rate
municipal bonds.  Our short-term investments are classified as
available-for-sale securities.  Our investments in auction rate
securities were recorded at cost, which approximated fair value due to their
variable interest rates, which typically reset within 35 days.  These
securities were liquidated subsequent to year-end at carrying value plus
interest.  Our US Treasury Bills are also recorded at cost, which
approximated fair value.




Accounting
for Joint Venture




We are
party to the Joint Venture with Sony Pictures to pursue licensing opportunities
relating to characters based upon movies or television shows featuring
Spider-Man and produced by Sony Pictures.  The operations of the Joint
Venture are included in our Licensing segment.




F-10
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.           Summary
of Significant Accounting Policies (continued)




The
operations of the Joint Venture have been consolidated in our financial
statements, including revenues of $122.0 million, $4.1 million and $24.7 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.  The Joint Venture distributes to us and to Sony
Pictures all cash received, proportionate to each party’s interest, on at least
a quarterly basis.  At December 31, 2007, we had $0.6 million in
minority interest distributions due to Sony Pictures.  At December 31,
2006, advances to joint venture partner of $8.5 million reflects distributions
made to Sony Pictures in connection with cash received by the Joint Venture from
minimum royalty advances on licensing contracts for which the Joint Venture has
not yet recognized revenue and earnings thereon.  These advances or
payments due are classified as current or non-current consistent with the
classification of deferred revenue related to such advances, which is, based on
when the underlying deferred revenue is scheduled to be recognized.




Inventories




Inventories
are valued at the lower of cost (first-in, first-out method) or market (see Note
3).




Molds
and Tools




Molds and
tools are stated at cost less accumulated amortization.  For financial
reporting purposes, amortization is computed using the straight-line method over
the estimated selling life of related products.  Accumulated
amortization related to molds and tools was $3.8 million and $2.1 million at
December 31, 2007 and 2006, respectively.




Product
and Package Design Costs




Product
and package design costs are stated at cost less accumulated
amortization.  For financial reporting purposes, amortization of
product and package design is computed using the straight-line method over the
estimated selling life of related products.  Accumulated amortization
related to product and package design costs was $2.3 million and $1.7 million at
December 31, 2007 and 2006, respectively.




Fixed
Assets




Fixed
assets are stated at cost less accumulated depreciation and amortization. For
financial reporting purposes, depreciation and amortization is computed using
the straight-line method generally over a three to five-year life for furniture
and fixtures and office equipment, and over the shorter of the life of the
underlying lease or estimated useful life for leasehold improvements.
Expenditures for major software purchases and software developed for internal
use are capitalized and depreciated using the straight-line method over the
estimated useful lives of the related assets, which is generally 3 years. For
software developed for internal use, all external direct costs for materials and
services are capitalized in accordance with AICPA Statement of Position (SOP)
98-1, “Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.” Total capitalized internal use software costs were $3.5 million
and $3.4 million at December 31, 2007 and 2006,
respectively.  Accumulated depreciation for fixed assets was $3.2
million and $2.4 million at December 31, 2007 and 2006, respectively, of which
$2.0 million and $1.1 million related to internal use
software.  Depreciation expense for internal use software was $1.0
million, $0.6 million and $0.2 million for the years ended December 31, 2007,
2006 and 2005, respectively.




F-11
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.           Summary
of Significant Accounting Policies (continued)




Goodwill




We
account for our goodwill under Statement of Financial Accounting Standards
(“SFAS”) No.142, “Goodwill and Other Intangible Assets” (“SFAS
142”).  Our goodwill is deemed to have an indefinite life and is no
longer amortized, but is subject to annual impairment tests. If facts or
circumstances suggest that our goodwill is impaired, we assess the fair value of
the goodwill and reduce it to an amount that results in book value approximating
fair value.  Under SFAS 142, goodwill impairment is deemed to exist if
the net book value of a reporting unit exceeds its estimated fair
value.  As of December 31, 2007, our goodwill was not
impaired.  During 2007, goodwill increased $4.4 million as a result of
a deferred tax asset adjustment attributable to state net operating
losses.




Long-Lived
Assets




We record
impairment losses on long-lived assets used in operations 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.




Film
Production Operations




Film
Inventory




In
general, we are responsible for all of the costs of developing and producing our
feature films.  The film’s distributor is responsible for the
out-of-pocket costs, charges and expenses (including contingent compensation and
residual costs, to a defined limit) incurred in the distribution, manufacturing,
printing and advertising, marketing, publicizing and promotion of the film in
all media.  After remitting to us five percent of the film’s gross
receipts, the distributor is entitled to retain a fee based upon the film’s
gross receipts and to recoup all of its costs on a film-by-film basis prior to
our receiving any additional cash proceeds.  Any of the distributor’s
costs for a film that are not recouped against receipts for that film are borne
by the distributor.




In
accordance with the AICPA Statement of Position 00-2, “Accounting by Producers
or Distributors of Films” (SOP 00-2), we capitalize all direct film production
costs, such as salaries, visual effects and set construction.  Those
capitalized costs, along with capitalized overhead and capitalized interest
costs, appear on our balance sheet as an asset called film
inventory.  Capitalization of film production overhead and interest
costs commences upon completion of the initial funding requirements of the
production and ceases upon completion of the production.  Production
overhead includes allocable costs, including salaries and benefits (including
stock compensation), of individuals or departments with exclusive or significant
responsibility for the production of films.  Capitalized production
overhead does not include other selling, general and administrative
expenses.  In 2007 and 2006, we capitalized interest costs of $8.4
million and $0.2 million, respectively.




In
accordance with SOP 00-2, we also capitalize, into film inventory, the costs of
projects in development.  Those costs consist primarily of script
development.  In the event that a film is not scheduled for production
within three years from the time of the first capitalized transaction, or if an
earlier decision is made to abandon the project, all capitalized costs will be
expensed.  During 2007, $1.3 million of film development costs were
written off and were included in selling, general and administrative expense in
the accompanying statement of net income.




F-12
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.           Summary of Significant Accounting
Policies (continued)




Once a
film is released, in accordance with SOP 00-2, the amount of film inventory
relating to that film is amortized and included in each period’s costs of
revenue in the proportion that the film’s revenue during the period (“Current
Revenue”) bears to the film’s then-estimated total revenue over a period not to
exceed ten years (“Ultimate Revenue”).  The amount of film inventory
amortized into costs of revenue as a percentage of film revenue may vary from
period to period due to several factors, including changes in the mix of films
earning revenue, and changes in any film’s Ultimate Revenue and
costs.




The first
two films under production by the Film Production segment, Iron Man and The Incredible Hulk, are
scheduled for release in May and June 2008, respectively.  As of
December 31, 2007, our Film Production segment had film inventory of $264.8
million, primarily for these productions.  In addition, for the year
ended December 31, 2007, the Film Production segment incurred $8.7 million in
selling, general and administrative expenses, consisting primarily of
non-capitalized employee compensation and the segment’s share of the expenses
associated with our California office.




Revenue




The
amount of revenue recognized from our films in any given period depends on the
timing, accuracy and sufficiency of the information we receive from our
distributors.




Revenue
from the theatrical distribution of our films in most territories will begin to
be recognized when theatrical receipts are reported to us by the film’s
distributor.  In these territories, we will recognize revenue from
each film in the amount of five percent of gross receipts and, beyond that, to
the extent that gross receipts exceed the distributor’s fee and the costs
payable by the distributor.  There are five territories in which we
have received minimum guaranties from local distributors.  In those
territories, we will begin to recognize revenue when the film is available for
exhibition in theaters.




Revenue
from the sale of home video units will be recognized when video sales to
customers are reported by our distributors.  We will follow the
practice of providing for future returns of home entertainment product at the
time the products are sold.  We will calculate an estimate of future
returns of product by analyzing a combination of our distributors’ historical
returns, our distributors’ estimates of returns of our home video units, current
economic trends, projections of consumer demand for our home video units and
point-of-sale data available from retailers.  Based on this
information, a percentage of each sale will be reserved for possible returns,
provided that the customer has the right of return.  Generally,
customer payment terms are expected to be within 90 days from the end of the
month in which the product will be shipped.  Actual returns will be
charged against the reserve.




Revenue
from both free and pay television licensing agreements will be recognized at the
time the production is made available for exhibition in those
markets.




Changes
in estimates of future Ultimate Revenues from feature films could result in the
write-off or the acceleration of the amortization of film
inventory.  Unamortized film inventory is evaluated for impairment
each reporting period on a film-by-film basis.  If estimated remaining
revenue is not sufficient to recover the unamortized film inventory, the
unamortized film inventory will be written down to fair value.  In any
given quarter, if the Film Production segment lowers its forecast of Ultimate
Revenue for any individual film, we will accelerate the amortization of the film
inventory related to that film.




F-13
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.           Summary
of Significant Accounting Policies (continued)




Deferred
Financing Costs




Deferred
financing costs relate to our film facility (see Note 4) and are being amortized
over the minimum expected term of the facility, which approximates 4.5
years.  Amortization for the years ended December 31, 2007 and 2006
was $5.0 million.




Treasury
Shares




We account for treasury shares using the cost
method.  During the year ended December 31, 2007, we repurchased 8.5
million shares of our common stock at a cost of $212.0 million under two stock
repurchase programs. During 2006, we repurchased 15.6 million shares of our
common stock at a cost of $287.4 million. As of December 31, 2007, 30.9 million
of our shares held in treasury are pledged as collateral under the HSBC Line of
Credit, as defined in Note 4 below.




Comprehensive
Income




We follow
the provisions of SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”),
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 us,
comprehensive income represents net income adjusted for the unrecognized loss
related to the minimum pension liability of a former subsidiary and cumulative
foreign currency translation adjustments associated with our foreign
subsidiaries.  In accordance with SFAS 130, we have chosen to disclose
comprehensive income in the Consolidated Statements of Stockholders’ Equity and
Comprehensive Income.  Other comprehensive income is reflected net of
income tax benefit (expense) of $0.7 million in 2007, ($0.2) million in 2006 and
$0.5 million in 2005.




Research
and Development




Research
and development costs, primarily design costs, are charged to operations as
incurred. For the years ended December 31, 2007, 2006 and 2005, research and
development expenses were $0.1 million, $3.1 million and $1.8 million,
respectively.




Revenue
Recognition




Merchandise
Sales, Sales Returns and Customer Allowances




Merchandise
sales, including toys, trade paperback and hardcover book sales, returnable
comic books and custom publishing, 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.  We
regularly review and revise, when considered necessary, our estimates of sales
returns based primarily upon actual returns, planned product discontinuances,
and estimated sell-through at the retail level. No provision for sales returns
is provided when the terms of the underlying sales do not permit the customer to
return product to us.  Return rates for returnable comic book sales,
traditionally sold at newsstands and bookstores, are typically higher than those
related to trade paperback and hardcover book sales.




F-14
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.      Summary
of Significant Accounting Policies (continued)




Comic
book revenues – non-returnable and other




Sales of
comic books to the direct market, our largest channel of comic book
distribution, are made on a non-returnable basis and related revenues are
recognized in the period the comic books are made available for sale (on-sale
date established by us).  Revenue from advertising in our comic books
is also recognized in the period that the comic books are made available for
sale.  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 licensing our characters is recorded in accordance with guidance provided
in Securities and Exchange Commission Staff Accounting Bulletin No. 104 “Revenue
Recognition” (an amendment of Staff Accounting Bulletin No. 101 “Revenue
Recognition”) (“SAB 104”). Under the SAB 104 guidelines, revenue is recognized
when the earnings process is complete.  This is considered to have
occurred when persuasive evidence of an agreement between us and the customer
exists, when the characters are freely and immediately exploitable by the
licensee and we have satisfied our obligations under the agreement, when the
amount of revenue is fixed or determinable and when collection of unpaid revenue
amounts is reasonably assured.




For
licenses that contain non-refundable minimum payment obligations to us, we
recognize such non-refundable minimum payments as revenue at the inception of
the license, prior to the collection of all amounts ultimately due, provided all
the criteria for revenue recognition under SAB 104 have been
met.  Receivables from licensees due more than one year beyond the
balance sheet date are discounted to their present value.




The
earnings process is not complete if, among other things, we have significant
continuing involvement under the license, we have placed restrictions on the
licensee’s ability to exploit the rights conveyed under the contract or we owe a
performance obligation to the licensee.  In the case where we have
significant continuing involvement or where any restrictions remain on the
licensee’s rights (e.g., no sales of products based on a specific character
allowed until a future date), we recognize revenue as the licensee reports its
sales and corresponding royalty obligation to us. Where we have a performance
obligation, minimum royalty collections are not recognized until our performance
obligation has been satisfied. Minimum payments collected in advance of
recognition are recorded as deferred revenue.  In any case where we
are unable to determine that the licensee is sufficiently creditworthy, we
recognize revenue only to the extent of cash collections.  When
cumulative reported royalties exceed the minimum royalty payments, the excess
royalties are recorded as revenue when collected and are referred to as
“overages”.




Revenues
related to the licensing of animation are recorded in accordance with SOP 00-2
and are recognized when persuasive evidence of a sale or licensing arrangement
with a customer exists, when an episode is delivered in accordance with the
terms of the arrangement, when the license period of the arrangement has begun
and the customer can begin its exhibition, when the arrangement fee is fixed or
determinable, and when collection of the arrangement fee is reasonably
assured.




Advertising
Costs




Advertising
production and media costs are expensed when the advertisement is first run. For
the years ended December 31, 2007, 2006, and 2005, advertising expenses were
$1.7 million, $3.0 million and $13.0 million, respectively.




F-15
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.           Summary
of Significant Accounting Policies (continued)




Licensed-in
Toy Royalties




We enter
into licensing agreements for the right to use third-party intellectual property
in our Toy segment operations, which often contain minimum royalty payment
obligations.  Prepaid minimum royalty obligations are expensed based
on sales of related products.  The realizability of prepaid minimum
royalties is evaluated by us based on the projected sales of the related
products.  We record impairment losses on prepaid minimum royalties
when events and circumstances indicate that the royalty applicable to forecasted
sales will not be sufficient to recover the prepaid minimum
royalty.




Studio
and Talent Share of Royalties




We share
merchandise licensing revenues with movie studio licensees for Marvel characters
portrayed in theatrical releases.  Typically, the studio is paid up to
50% of the total license income derived from licensing for a specific character,
in most cases net of a distribution fee retained by us, and in some instances
with adjustments for characters that have generated sales prior to the
theatrical release. In accounting for amounts payable to studios under
multi-character licensing agreements, we make an initial estimate of how minimum
guarantees recognized as revenue will be shared among the various
studios.  This estimate is subsequently adjusted based on actual
royalties reported to us by our licensees.  We also share merchandise
licensing revenue with talent for the use of their likeness in licensed
products.  We accrue our obligation to talent based upon the talent’s
participation rate as stated, the underlying arrangement between our studio
licensee and talent and the sales/royalty information for licensed products
which use the talent likeness.  In 2007, 2006 and 2005, we provided
for $42.8 million, $23.6 million and $54.5 million, respectively, for the share
of royalties due to movie studios and talent.




Income
Taxes




We use
the liability method of accounting for income taxes as prescribed by Financial
Accounting Standard No. 109, Accounting for Income Taxes (FAS 109). 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 enacted tax rates and laws that are expected to be in effect when
the differences reverse.




Income
tax expense includes U.S. federal, state and local, 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.




We
consider future taxable income and potential tax planning strategies in
assessing the potential need for valuation allowances against our deferred tax
assets.  If actual results differ from estimates or if we adjust these
assumptions in the future, we may need to adjust our deferred tax assets or
liabilities, which could impact our effective tax rate in future
periods.




On
January 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for
uncertain income tax positions. This interpretation requires us to recognize in
the consolidated financial statements only those tax positions determined to be
more likely than not of being sustained upon examination, based on the technical
merits of the positions under the presumption that the taxing authorities have
full knowledge of all relevant facts (see Note 8).  The determination
of which tax positions are more likely than not of being sustained requires the
use of significant judgments and estimates by management, which may or may not
be borne out by actual results.




F-16
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.           Summary
of Significant Accounting Policies (continued)




Foreign
Currency Translation




The
financial position and results of all of our foreign operations are measured
using the local currency as the functional currency.  Assets and
liabilities of foreign subsidiaries are translated at the exchange rate in
effect at year end. Income statement accounts and cash flows of foreign
subsidiaries are translated at the average rate of exchange prevailing during
the period.




Pension




In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and recognize changes in the funded status in the year in which the
changes occur.  SFAS 158 also eliminates the option to use an
early measurement date effective for fiscal years ending after December 15,
2008.  We adopted the recognition provisions of SFAS 158 effective
December 31, 2006, and early adopted the measurement provision in the first
quarter of 2007.  The impact of this adoption was minimal as a result
of our already reporting our unfunded obligation related to the Fleer/Skybox
Plan (as defined in Note 11), a frozen plan, as a liability in the statement of
financial position.




Stock
Based Compensation




Effective
January 1, 2006, we adopted the provisions SFAS No. 123(R)
“Share-Based Payment” (“SFAS 123R”), which establishes accounting for
equity instruments exchanged for employee services. Under the provisions of
SFAS 123R, share-based compensation cost is measured at the grant date,
based on the calculated fair value of the award, and is recognized as an expense
over the employee’s requisite service period (generally the vesting period of
the equity grant).  SFAS No. 123R also requires the related
excess tax benefit received upon exercise of stock options or vesting of
restricted stock, if any, to be reflected in the statement of cash flows as a
financing activity rather than an operating activity. In connection with the
implementation of SFAS No. 123R, we elected the short-cut method in
determining our additional paid-in capital pool of windfall benefits and the
graded vesting method to amortize compensation expense over the service
period.




We did
not grant any stock option awards during 2007 or 2006. During the years ended
December 31, 2007 and 2006, we recognized $2.3 million and $5.9 million,
respectively, of compensation expense associated with previously granted stock
options, which was classified in selling, general and administrative expense.
 The charge for the year ended December 31, 2007 and 2006, net of income
tax benefit of $0.9 million and $2.3 million, respectively, has reduced basic
and diluted earnings per share by $0.02 and 0.04, respectively.  The
tax benefit to be realized from stock-based compensation totals $2.5
million and $64.8 million for the years ended December 31, 2007 and 2006,
respectively.  During 2005, which precedes the adoption of SFAS 123R,
options granted with exercise prices at fair value on the dates of grant
resulted in no charge to compensation expense in 2005.




As of
December 31, 2007, all of our issued stock options have vested and, accordingly,
we have no remaining unrecognized compensation cost related to nonvested stock
option awards as of December 31, 2007.  As of December 31, 2006,
unrecognized compensation costs related to nonvested stock option awards was
$2.3 million.




F-17
 INDEX
 MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007
  2.           Summary
of Significant Accounting Policies (continued)




Prior to
January 1, 2006, we accounted for share-based compensation to employees in
accordance with Accounting Principles Board Opinion No. 25, (“APB 25”)
“Accounting for Stock Issued to Employees,” and related
interpretations.  Had we applied the fair value recognition provisions
of SFAS 123 to share-based employee awards in 2005, the effects on net income
and earnings per share for that year would have been as follows (in thousands,
except per share data):





Net
      income, as reported
            $
            102,819Add:
      Stock-based compensation expense included in
              reported
      net income, net of taxes
            
            3,059Deduct:
      Total stock-based compensation expense
              determined
      under fair-value based method for all awards, net of taxes
            
            (8,831
            )Pro
      forma net income
            $
            97,047Basic
      earnings per share:As reported
            $
            1.03Pro-forma
            
            0.97Diluted
      earnings per share:As reported
            
            0.97Pro forma
            
            0.92





We used
the Black-Scholes option pricing model to value the compensation expense
associated with our stock option awards under SFAS 123R.  In addition,
we estimated forfeitures when recognizing compensation expense associated with
our stock options, and adjusted our estimate of forfeitures when they were
expected to differ.  Key input assumptions used to estimate the fair
value of stock options include the market value of the underlying shares at the
date of grant, the exercise price of the award, the expected option term, the
expected volatility (based on historical volatility) of our stock over the
option’s expected term, the risk-free interest rate over the option’s expected
term, and our expected annual dividend yield.




The
Black-Scholes option pricing model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, the option valuation model requires the input of
highly subjective assumptions. Because our employee stock options have
characteristics significantly different from those of 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 measure of the fair value of our employee stock
options.




F-18
 INDEX


MARVEL
ENTERTAINMENT, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





December
31, 2007




2.      Summary
of Significant Accounting Policies (continued)




Fair
Value of Financial Instruments




The
estimated fair value of certain of our financial instruments, including cash and
cash equivalents, short-term investments, current portion of accounts
receivable, accounts payable and accrued expenses approximate their carrying
amounts due to their short term maturities. The carrying value of our auction
rate municipal bonds approximates their fair value due to their variable
interest rates, which typically reset within 35 days.  The short term
(three months to six months) US Treasury bills carrying value approximate fair
value due to their short term duration.  The non-current portion of
accounts receivable have been discounted to their net present value, which
approximates fair value. The carrying value of our film facility debt
approximates its fair value because the interest rates applicable to such debt
are based on floating rates identified by reference to market
rates.  The fair value of the interest rate cap agreement ($1.1
million and $2.0 million at December 31, 2007 and 2006) is the estimated amount
that we would receive to terminate the agreement as of such
dates.  The fair value of forward currency contracts is the estimated
amount at which they can be settled based on forward market exchange
rates.  There were no open forward currency contracts at December 31,
2007.  Gains and losses from changes in the fair value of the interest
rate cap and forward currency contracts are recorded within other income in the
accompanying consolidated statements of net income.




Concentration
of Risk




We
generally require toy customers who are shipped products directly from East Asia
to secure their orders with an irrevocable letter of credit or advance
funds.  Our publishing and licensing activities generally do not
require collateral or other security with regard to balances due from
customers.  We extend credit to our customers in the normal course of
business and perform periodic credit evaluations of our customers, maintaining
allowances for potential credit losses.  We consider concentrations of
credit risk in establishing the allowance for doubtful accounts and believe the
recorded allowance amount is adequate.




We
distribute our comic books to the direct market through a major comic book
distributor. Termination of this distribution agreement could significantly
disrupt our publishing operations.




Income
Per Share




In
accordance with SFAS No. 128 “Earnings Per Share”, basic income per share is
computed by dividing net income attributable to common stock by the weighted
average number of shares of common stock outstanding during the
periods.  The computation of diluted income per share is similar to
the computation of basic income per share, except the number of shares is
increased assuming the vesting of restricted stock and the exercise of dilutive
stock options and warrants, using the treasury stock method, unless the effect
is anti-dilutive.  For the years ended December 31, 2007, 2006 and
2005, 375,000, 948,508 and 1,391,987 of stock options, respectively, with
exercise prices greater than the average fair market price for the period, were
anti-dilutive and not included in the diluted earnings per share calculations
because of their anti-dilutive effect.  In addition, a warrant, issued
in 2005, to purchase 260,417 shares of our common stock with an exercise price
greater than the average fair market price for a period, was anti-dilutive and
not included in the diluted earnings per share calculations because of its
anti-dilutive effect during 2005 and the first three quarters of
2006.  In the fourth quarter of 2006 through the third quarter of
2007, this warrant was in the money, and included in the diluted earnings per
share calculation.  In September 2007, these warrants were exercised
in a cashless exercise that resulted in the issuance of 19,830 shares of common
stock.




F-19
 INDEX


MARVEL
ENTERTAINMENT, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





December
31, 2007




2.      Summary
of Significant Accounting Policies (continued)




Recent
Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 (our
fiscal year beginning January 1, 2008), and interim periods within those
fiscal years. We are currently evaluating the effect of this Statement on our
consolidated financial statements.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment to FASB
Statement No. 115” (“SFAS 159”). This standard permits entities to
choose to measure many financial instruments and certain other items at fair
value and is effective for the first fiscal year beginning after
November 15, 2007, which is our 2008 fiscal year. We are currently
evaluating the effect of this Statement on our consolidated financial
statements.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” ("SFAS 141R").  SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, the
goodwill acquired and any noncontrolling interest in the
acquiree.  This statement also establishes disclosure requirements to
enable the evaluation of the nature and financial effect of the business
combination.  SFAS 141R is effective for fiscal years beginning after
December 15, 2008.  We are currently evaluating the effect of this
Statement on our consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51," (“SFAS
160”).  SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.  We are currently evaluating the effect of
this Statement on our consolidated financial statements.





F-20
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


3.           Details
of Certain Balance Sheet Accounts




December
      31,2007
            
            2006(in
      thousands)Accounts
      receivable, net, consists of the following:Toys:Accounts
      receivable
            
            $
            2,124
            
            $
            16,221Less
      allowances for:Doubtful
      accounts
            
            
            (300
            )
            
            (328
            )Sales
      discounts
            
            
            –
            
            
            (5,342
            )Total
      toys
            
            
            1,824
            
            
            10,551Publishing:Accounts
      receivable
            
            
            29,345
            
            
            27,706Less
      allowances for:Doubtful
      accounts
            
            
            (175
            )
            
            (175
            )Allowance
      for returns
            
            
            (15,019
            )
            
            (13,162
            )Total
      publishing
            
            
            14,151
            
            
            14,369Licensing:Accounts
      receivable
            
            
            13,330
            
            
            36,076Less
      allowances for doubtful accounts
            
            
            (626
            )
            
            (1,604
            )Total
      licensing
            
            
            12,704
            
            
            34,472Total
            
            $
            28,679
            
            $
            59,392Inventories,
      net, consists of the following:Toys:Finished
      goods
            
            $
            479
            
            $
            734Component
      parts, raw materials and work-in-process
            
            
            –
            
            
            79Total
      toys
            
            
            479
            
            
            813Publishing:Finished
      goods
            
            
            5,264
            
            
            4,152Editorial
      and raw materials
            
            
            4,904
            
            
            5,259Total
      publishing
            
            
            10,168
            
            
            9,411Total
            
            $
            10,647
            
            $
            10,224Accounts
      receivable - licensing, non – current portion are due as
      follows:2008
            
            $
            –
            
            $
            12,0152009
            
            
            1,370
            
            
            1,4462010
            
            
            –
            
            
            –Discounting
            
            
            (70
            )
            
            (582
            )Total
            
            $
            1,300
            
            $
            12,879





F-21
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007




3.      Details
of Certain Balance Sheet Accounts (continued)




Film
      inventory consist of the following:Development
            
            $
            2,991
            
            $
            3,764Preproduction
            
            
            –
            
            
            11,291Production
            
            
            261,826
            
            
            –Total
            
            $
            264,817
            
            $
            15,055Accrued
      royalties consists of the following:Merchandise
      royalty obligations
            
            $
            2,796
            
            $
            2,130Freelance
      talent
            
            
            4,570
            
            
            2,807Studio
      and talent share of royalties
            
            
            77,328
            
            
            63,530Total
            
            $
            84,694
            
            $
            68,467Accrued
      expenses and other current liabilities consist of the
      following:Inventory
      purchases
            
            $
            2,327
            
            $
            7,413Bonuses
            
            
            8,059
            
            
            8,319Litigation
      accruals
            
            
            1,625
            
            
            897Licensing
      common marketing fund
            
            
            7,498
            
            
            8,345Interest
            
            
            5,639
            
            
            2,179Freelancers’
      incentive
            
            
            925
            
            
            871Other
      accrued expenses
            
            
            10,939
            
            
            10,871Total
            
            $
            37,012
            
            $
            38,895







4.
            Debt
      Financing




We have
entered into three debt facilities in connection with our film-production
activities.  Each of those facilities, along with our general
corporate credit line, is described below.




Film
Facilities




Film
Facility




On
September 1, 2005, we closed a $525 million financing, through our wholly-owned
consolidated subsidiary, MVL Film Finance LLC, which enables us to produce our
own slate of feature films.  Borrowings under the film facility are
non-recourse to us and our affiliates, other than MVL Film Finance
LLC.  MVL Film Finance LLC has pledged all of its assets, principally
consisting of the theatrical film rights to the characters included in the film
facility and the rights to completed films or films in production, as collateral
for the borrowings.  The film facility expires on September 1, 2016,
or sooner if the films produced under the facility fail to meet certain defined
performance measures.  The film facility consists of $465 million in
revolving senior bank debt and $60 million in mezzanine debt, which is
subordinated to the senior bank debt.  Both Standard & Poor’s, a
division of the McGraw-Hill Companies, Inc., and Moody’s Investor Rating
Service, Inc. have given the senior bank debt an investment grade
rating.  In addition, Ambac Assurance Corporation has insured
repayment of the senior bank debt, raising its rating to AAA.  In
exchange for the repayment insurance, we pay Ambac a fee calculated as a
percentage of senior bank debt. The interest rates for outstanding senior bank
debt, and the fees payable on unused senior bank debt capacity, both described
below, include the percentage fee owed to Ambac.




F-22
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


4.
            Debt
      Financing (continued)




The
interest rate for outstanding senior bank debt is LIBOR or the commercial paper
rate, as applicable, plus 1.635% in either case.  The film facility
also requires us to pay a fee on any senior bank debt capacity that we are not
using.  This fee is 0.60%, and is applied on $465 million reduced by
the amount of any outstanding senior bank debt.




If
Ambac’s rating by either S&P or Moody’s falls below AAA, the interest rate
for outstanding senior bank debt would increase by 1.30% and the fee payable on
any unused senior bank debt capacity would increase by 0.30%.  If the
senior bank debt’s rating (without giving effect to Ambac’s insurance) by either
S&P or Moody’s falls below investment grade, the interest rate for the
outstanding senior bank debt could increase by up to an additional
0.815%.  In addition, if we become more leveraged, the interest rate
for outstanding senior bank debt could increase by up to an additional
0.50%.




The
interest rate for the mezzanine debt is LIBOR plus 7.0%.  The
mezzanine debt was drawn on first and will remain outstanding for the life of
the film facility.




The film
facility requires the maintenance of minimum tangible net worth and compliance
with various administrative covenants.




We
entered into an interest rate cap agreement in connection with the film facility
whereby LIBOR is capped at 6.0% for debt outstanding under the film facility up
to certain stipulated notional amounts which vary over the term of the film
facility. The notional amount of debt associated with the interest rate cap
agreement at December 31, 2007 was $231.0 million.  The interest rate
cap is recorded at fair value ($1.1 million) and included in other assets in the
accompanying balance sheet at December 31, 2007.  Fair value of the
interest rate cap at December 31, 2006 was $2.0 million.  The interest
rate cap expires on October 15, 2014.




As of
December 31, 2007, MVL Film Finance LLC had $246.9 million ($33.2 million as of
December 31, 2006) in outstanding borrowings under the film
facility.  Borrowings have been used to fund direct production costs
of our Iron Man and
The Incredible Hulkfeature films, to fund the interest payments of the film facility, to
fund the finance transaction costs related to the closing of the facility and to
purchase the interest rate cap.




Iron
Man Facility




On
February 27, 2007, we closed a $32.0 million financing with Comerica Bank (the
“Iron Man Facility”) through our wholly-owned consolidated subsidiary, Iron
Works Productions LLC.  The proceeds of this financing may only be
used to fund the production of our Iron Man feature film. 
Borrowings under this facility are non-recourse to us and our affiliates other
than with respect to the collateral pledged to this facility, which consists of
various affiliated film companies’ rights to distribute the Iron Man film in Australia
and New Zealand, Japan, Germany, France and Spain (the “Reserved Territories”)
and the contracts that MVL Productions LLC has entered into with third-party
distributors to distribute Iron Man in these Reserved
Territories.  This facility, which expires on July 25, 2008 or sooner if an
event of default occurs, consists of $32.0 million in bank debt but contains a
$2.5 million interest reserve that will prevent us from borrowing the full
amount.  The rate for borrowings under this facility is the bank’s
prime rate or LIBOR plus 1%, at our election.  The facility contains
customary event-of-default provisions and covenants regarding our film-related
affiliates, the production of the Iron Man movie and our
ownership of the intellectual property underlying the Iron Man movie.  As
of December 31, 2007, the Iron Man Facility had $25.5 million in outstanding
borrowings.




F-23
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


4.
            Debt
      Financing (continued)




Hulk
Facility




On June
29, 2007, we closed a $32.0 million financing with HSBC Bank USA, National
Association (the “Hulk Facility”) through our wholly-owned consolidated
subsidiary, Incredible Productions LLC.  The proceeds of this
financing may only be used to fund the production of our The Incredible Hulk feature
film.  Borrowings under this facility are non-recourse to us and our
affiliates other than with respect to the collateral pledged to this facility,
which consists of various affiliated film companies’ rights to distribute The Incredible Hulkfilm in
the Reserved Territories and the contracts that MVL Productions LLC has entered
into with third-party distributors to distribute The Incredible Hulkin the
Reserved Territories.  This facility, which expires on September 30, 2008
or sooner if an event of default occurs, consists of $32.0 million in bank debt
but contains a $2.3 million interest reserve that will prevent us from borrowing
the full amount.  The rate for borrowings under this facility is the bank’s
prime rate or LIBOR plus 1%, at our election.  The facility contains
customary event-of-default provisions and covenants regarding our film-related
affiliates, the production of The Incredible Hulk movie and
our ownership of the intellectual property underlying The Incredible Hulk
movie.  As of December 31, 2007, the Hulk Facility had $16.8 million in
outstanding borrowings.




Corporate
Line of Credit




We
maintain a $100 million revolving line of credit with HSBC Bank USA,
National Association (the “HSBC Line of Credit”) with a sub-limit for the
issuance of letters of credit.  The HSBC Line of Credit expires on
March 31, 2010.  Borrowings under the HSBC Line of Credit may be used
for working capital and other general corporate purposes and for repurchases of
our common stock.  During the quarter ended September 30, 2007, the
HSBC Line of Credit was amended to replace the minimum net worth covenant with a
net income covenant and a minimum market capitalization
requirement.  The HSBC Line of Credit, as amended, contains customary
event-of-default provisions and a default provision based on our market
capitalization.  The facility contains covenants regarding our net
income, leverage ratio and free cash flow.  The HSBC Line of Credit is
secured by a first priority perfected lien in (a) our accounts receivable, (b)
our rights under our toy license with Hasbro and (c) all of our treasury stock
repurchased by us after November 9, 2005. Borrowings under the HSBC Line of
Credit bear interest at HSBC’s prime rate or, at our choice, at LIBOR plus 1.25%
per annum.  As of December 31, 2007, we had no borrowings outstanding
under the HSBC Line of Credit.




F-24
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


5.
            Stock-Based
      Compensation




On April
28, 2005, our stockholders approved our 2005 Stock Incentive Plan (the “2005
Plan”).  Since that date, new awards can no longer be made under our
1998 Stock Incentive Plan (the “1998 Plan”) (together with the 2005 Plan, the
“Plans”), but all outstanding awards under the 1998 Plan continue in accordance
with their terms.  The 2005 Plan authorizes a range of awards
including stock options, stock appreciation rights, restricted stock, other
awards based on common stock (including “phantom” stock), dividend equivalents,
performance shares or other stock-based performance awards, and shares issuable
in lieu of rights to cash compensation.  Eligible recipients of awards
under the 2005 Plan include officers, employees, consultants and
directors.  Under the 2005 Plan, 4.0 million shares plus the
approximately 2.6 million shares unused (out of 24 million authorized) under the
1998 Plan at the time of the 2005 Plan’s inception, along with shares subject to
awards under the 1998 Plan that are not delivered to the award’s recipient
(e.g., because the recipient’s employment ends before the award vests), may be
the subject of future awards.  Under the 2005 Plan, no more than 2.0
million shares plus any unused portion of the preceding year’s limit may be the
subject of awards to any one person during a calendar year as
“performance-based” compensation intended to qualify under Section 162(m) of the
Internal Revenue Code.  During any five-year period, no more than
250,000 shares may be the subject of awards under the 2005 Plan to any one
non-employee director.  Options granted under the 2005 Plan may not be
“repriced” (as defined in the rules of the New York Stock Exchange) without
stockholder approval.  Our practice has been to provide newly issued
shares upon exercise of stock options and for granting of restricted
stock.




Information
with respect to options issued under the Plans is as follows:







Shares
            
            Weighted
              Average
              Exercise
              PriceOutstanding
      at January 1, 2005
            
            15,150,246
            
            $
            6.55Canceled
            
            (31,336
            )
            $
            18.09Exercised
            
            (1,133,154
            )
            $
            4.88Outstanding
      at December 31, 2005
            
            13,985,756
            
            $
            6.66Canceled
            
            (79,246
            )
            $
            17.82Exercised
            
            (11,025,606
            )
            $
            4.25Outstanding
      at December 31, 2006
            
            2,880,904
            
            $
            15.54Canceled
            
            (1,233
            )
            $
            13.76Exercised
            
            (675,132
            )
            $
            17.86Outstanding
      at December 31, 2007
            
            2,204,539
            
            $
            14.83





F-25
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


5.      Stock-Based
Compensation (continued)




Stock
options outstanding at December 31, 2007 are summarized as follows:









Range
      of Exercise Prices
            
            
            Outstanding  and
      Exercisable Options at December 31, 2007
            
            
            Weighted
      Average Remaining Contractual Life – (Years)
            
            
            Weighted
      Average Exercise Price$1.59
      - $3.25
            
            
            82,700
            
            
            3.50
            
            $
            2.03$3.29
      - $6.61
            
            
            874,714
            
            
            2.42
            
            $
            4.88$6.99
      - $11.63
            
            
            108,500
            
            
            5.36
            
            $
            10.47$15.42
      - $21.50
            
            
            638,625
            
            
            2.82
            
            $
            18.98$25.00
      - $35.00
            
            
            500,000
            
            
            1.34
            
            $
            30.00







At
December 31, 2007, 2006 and 2005, there were 2,204,539, 2,668,810 and 12,984,579
exercisable options with a weighted average exercise price of $14.83, $15.26 and
$5.91, respectively.




Options
granted under the 1998 Plan generally vested in three equal annual installments
beginning twelve months after the date of grant. No options have been granted
during 2006 or 2007 under the 2005 Plan. At December 31, 2007, the weighted
average remaining contractual life of the options outstanding is 2.48 years, and
all of the options are fully vested.




The
aggregate intrinsic value of outstanding and vested stock options as of
December 31, 2007 was $28.1 million, of which all were vested. The
intrinsic value of options exercised during the year ended December 31,
2007 was $7.7 million.  The intrinsic value of options exercised
during the years ended December 31, 2006 and 2005 was $173.3 million and
$17.2 million, respectively.




Exercise
of Options for Restricted Stock




On
November 30, 2001, we entered into a six-year employment agreement with Mr.
Perlmutter, our Chief Executive Officer (since 2005) and largest
shareholder.  The agreement was subsequently extended through November
30, 2009.  Under the agreement, Mr. Perlmutter received six-year
options to purchase 5,925,000 common shares at a price of $2.41 per
share.  These options were exercised on June 2,
2006.  Shares obtained for the exercise of these options were
restricted shares until they vested.  The fair value of these shares,
which were based upon the Black-Scholes valuation of the option on its original
grant date, was $1.87 per share. The vesting period for these restricted shares
was one-third on the fourth, fifth and sixth anniversary of the agreement and,
as of December 31, 2007, all of these restricted shares have fully
vested.




F-26
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


5.      Stock-Based
Compensation (continued)




Restricted
Stock




Restricted
stock grants generally vest over a three or four-year period. The aggregate
market value of restricted stock at the dates of issuance was $9.6 million, $5.9
million and $6.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively, and is being recognized over the vesting period (the period over
which restrictions lapse).  In addition, when recognizing compensation
expense associated with our restricted stock, we estimate forfeitures, based on
historical trends, and adjust estimates of forfeitures when they are expected to
differ.  At December 31, 2007, we estimate that 9% of restricted stock
grants will be forfeited within the first year of the date granted, an
additional 5% within the second year of the date granted and none within the
third year of the date granted.




For the
years ended December 31, 2007, 2006 and 2005, we recognized $5.5 million,
$4.3 million and $4.8 million, respectively, of compensation expense associated
with restricted stock, which was classified in selling, general and
administrative expense.




The
following table summarizes the status of our restricted shares during the three
year period ended December 31, 2007:







Shares
            
            Weighted
              Average
              Fair
      Value at Grant DateOutstanding
      at January 1, 2005
            514,139
            
            $
            17.92Granted
      during 2005
            335,743
            
            
            19.69Vested
      during 2005
            (300,638
            )
            
            18.49Forfeited
      during 2005
            (47,337
            )
            
            17.57Outstanding
      at December 31, 2005
            501,907
            
            
            18.88Granted
      during 2006
            352,526
            
            
            16.80Vested
      during 2006
            (151,925
            )
            
            17.43Forfeited
      during 2006
            (155,984
            )
            
            18.11Outstanding
      at December 31, 2006
            546,524
            
            
            18.16Granted
      during 2007
            352,093
            
            
            27.30Vested
      during 2007  (1)
            (204,061
            )
            
            19.92Forfeited
      during 2007
            (21,588
            )
            
            21.62Outstanding
      at December 31, 2007
            672,968
            
            
            22.30





(1) Includes 44,500 shares with a
weighted average fair value of $19.29 that were exchanged, prior to vesting, for
stock units (defined below).





The total
remaining unrecognized compensation cost related to restricted stock awards is
$8.0 million as of December 31, 2007. The weighted average period over
which this cost is expected to be recognized is 1.9 years. The weighted average
fair value of restricted stock vested during the year ended December 31, 2007
was $19.92 per share.




F-27
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


5.      Stock-Based
Compensation (continued)




As of
December 31, 2007, we had reserved a total of 8.3 million shares of our common
stock for issuance under the Plans, including 6.1 million shares that are
available for future grants under the 2005 Plan.




Stock
Units




Each of
our stock units provides its holder with the right to receive a share of our
common stock as soon as we reasonably anticipate that our U.S. federal income
tax deduction for the compensation resulting from the issuance of the stock will
not be limited or eliminated by application of Section 162(m) of the Internal
Revenue Code.  The units were granted in exchange for restricted shares of
our common stock, and were subject to forfeiture until the vesting date of the
stock exchanged.  All of the units are now vested.  As of December 31,
2007, 44,500 stock units had been granted and remained subject to
settlement.




Phantom
Stock




We have
issued to certain employees phantom stock units that generally vest over a
three-year period and are settled through a cash payment equal to the fair value
of our common stock at the vesting date.  In addition, we estimate
forfeitures when recognizing compensation expense associated with phantom stock
units, and adjust our estimate of forfeitures when they are expected to differ.
For the years ended December 31, 2007 and 2006, forfeitures were estimated to
not be material. We record a liability for amounts expected to be payable for
phantom stock units, based on the fair value of our common stock at the balance
sheet date less estimated forfeitures. The expense associated with phantom stock
units for the years ended December 31, 2007 and 2006 was $0.3 million and $0.5
million, respectively.




6.
            Sales
      to Major Customers and International
Operations




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 years ended December 31, 2007 and 2005, one customer in each of these years
accounted for 15% and 28%, respectively, of Licensing segment net sales and in
2005, accounted for 16% of our consolidated net sales.




We
distribute our comic books and trade paperbacks to the direct market through a
major comic book distributor.  During the years ended December 31,
2007, 2006 and 2005, net sales made through this distributor to the direct
market accounted for 68%, 70% and 70%, respectively, of Publishing segment net
sales.  This distributor also distributes our trade paperbacks to mass
bookstore merchandisers.  Total net sales made through this
distributor during the years ended December 31, 2007, 2006 and 2005 accounted
for 81%, 80% and 79%, respectively, of Publishing segment net sales and 21%, 25%
and 19%, respectively, of our consolidated net sales.  This
distributor also accounted for 33.7% and 15.2% of consolidated accounts
receivable at December 31, 2007 and 2006, respectively.




During
the year ended December 31, 2007, royalties and service fees earned from Hasbro,
Inc. (“Hasbro”) accounted for 81% of Toy segment net sales and 15% of our
consolidated net sales.  During the year ended December 31, 2006,
three customers accounted for 29%, 14% and 11%, respectively, of the Toy
segment’s net sales.  During the year ended December 31, 2005,
royalties and service fees earned from our licensee, Toy Biz Worldwide, Ltd.
(“TBW”) accounted for 76% of Toy segment net sales and 13% of our consolidated
net sales.




F-28
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


6.
            Sales
      to Major Customers and International Operations
  (continued)




Our
wholly-owned Hong Kong subsidiaries supervise, with agency support, the
manufacturing of our products in China and sell such products internationally.
All sales by our Hong Kong subsidiaries are made F.O.B. Hong Kong against
letters of credit and other cash arrangements. During the years ended December
31, 2007, 2006, and 2005 international sales were approximately 11%, 30% and
34%, respectively, of total net toy sales. During the years ended December 31,
2007, 2006, and 2005 the Hong Kong operations reported operating income (loss)
of approximately $3.4 million, $8.9 million and ($0.2 million) and income before
income taxes of approximately $3.4 million, $8.9 million and ($0.1 million),
respectively. At December 31, 2007 and 2006, we had assets in Hong Kong of
approximately $0.6 million and $11.2 million, respectively, excluding
intercompany amounts.  The Hong Kong subsidiary’s retained earnings
were $57.3 million and $60.4 million at December 31, 2007 and 2006,
respectively.  Repatriation of such earnings to the United States
would bear nominal income taxes, if any.




7.
            Toy
      Licenses




We have
entered into a license agreement with Hasbro under which Hasbro has the
exclusive right to make action figures, plush toys and certain role-play toys,
and the non-exclusive right to make several other types of toys, featuring
Marvel characters.  The license gives Hasbro the right to sell those
toys at retail from January 1, 2007 though December 31, 2011 (subject to
extension under certain circumstances).  We provide brand expertise,
marketing support and other services to Hasbro in connection with the licensed
toys. Hasbro paid us an advance of $105 million under the license in 2006 and an
additional advance of $70 million in 2007.  The advances are being
recognized as revenue based upon sales of the related character-based
merchandise as reported by Hasbro. As of December 31, 2007, deferred revenue
related to the Hasbro license was approximately $98.6 million ($100.0 million as
of December 31, 2006), of which $53.6 million is classified as
non-current.  All Marvel character-based toys previously produced for
retail by TBW were produced and sold by our Toy segment in 2006.  In
2006, TBW acted as a sourcing agent to us and, in that capacity, helped us
locate suitable factories in China for the manufacture of certain of our
toys.




The year
2005 was the final year of our 2001 toy license with TBW, under which we
licensed to TBW the right to use the Marvel characters (other than characters
based on the Spider-Man movies) in producing and selling action figures and
accessories, and certain other toys.  Under a separate agency
agreement, Marvel also provided product development, marketing and sales
services for TBW in exchange for a service fee. We received royalties and
service fees from TBW based on TBW’s sales of Marvel-designed toys produced and
sold by TBW. On December 23, 2005, we terminated both the license and agency
agreements with TBW effective January 1, 2006.  In connection with
this early termination, we incurred a termination fee in 2005 of $12.5 million,
which is recorded in selling, general and administrative expenses in the
accompanying Consolidated Statement of Net Income.




During
2005, we earned royalties and service fees from TBW of $25.3 million and $26.5
million from TBW’s sale of Marvel related toy products licensed to
TBW.  For 2005, we were reimbursed $8.3 million for administrative and
management support. Such amounts have been recorded as a reduction to selling,
general and administrative expenses in our Toy segment.




We also
produce and sell toys based on licensed-in characters such as Curious
George.  Minimum royalties paid by us associated with these licenses
are not significant.  These operations are not affected by the former
license and other arrangements with TBW.




All
royalties received by us from the sales of toys licensed to parties other than
Hasbro or TBW during 2007, 2006 and prior were recorded as royalties in our
Licensing segment, as we did no product development, marketing, sales or other
services for these licensees.




F-29
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


8.
            Income
      Taxes




The
provision (benefit) for income taxes is based upon income (loss) before taxes as
follows:







Years
      ended December 31,2007
            
            2006
            
            2005(in
      thousands)United
      States
            $
            266,363
            $
            88,327
            $
            170,926Foreign
      jurisdictions
            
            (3,131
            )
            10,473
            
            122Total
            $
            263,232
            $
            98,800
            $
            171,048





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





Years
      ended December 31,2007
            
            2006
            
            2005(in
      thousands)Current:Federal
            
            $
            76,253
            
            $
            33,016
            
            $
            61,226State
      and local
            
            
            17,518
            
            
            803
            
            
            13,600Foreign
      (1)
            
            
            3,976
            
            
            5,552
            
            
            1,56797,747
            
            
            39,371
            
            
            76,393Deferred:Federal
            
            
            (3,562
            )
            
            (2,663
            )
            
            (11,823
            )State
      and local
            
            
            4,815
            
            
            2,381
            
            
            (1,538
            )Foreign
            
            
            (92
            )
            
            (18
            )
            
            (212
            )1,161
            
            
            (300
            )
            
            (13,573
            )Income
      tax expense
            
            $
            98,908
            
            $
            39,071
            
            $
            62,820





(1)
            Current
      foreign taxes include foreign withholding taxes in the amount of $4.4
      million, $3.1 million, and $1.9 million for 2007, 2006, and 2005,
      respectively.





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





Years
      ended December 31,2007
            
            2006
            
            2005Federal
      income tax provision computed at the statutory rate
            35.0%
            
            35.0%
            
            35.0%State
      and local taxes, net of federal income tax benefit
            6.1%
            
            3.2%
            
            5.9%Joint
      venture minority interest
            (3.3)%
            
            (0.4)%
            
            (3.5)%Valuation
      allowance
            0.2%
            
            0.2%
            
            1.0%Foreign
      taxes
            0.2%
            
            0.7%
            
            (0.7)%Other
            (0.6)%
            
            0.8%
            
            (1.0)%Total
      provision for income taxes
            37.6%
            
            39.5%
            
            36.7%




F-30
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007




8.      Income
Taxes (continued)




We are
not responsible for the income taxes related to the minority share of the Joint
Venture’s earnings.  The tax liability associated with the
minority share of the Joint Venture’s earnings is therefore not reported in
our income tax expense, even though the Joint Venture’s entire income is
consolidated in our reported income before income tax expense.  Joint
Venture earnings therefore have the effect of lowering our effective tax rate.
 This effect is more pronounced in periods in which Joint Venture earnings
are higher relative to our other earnings.




We retain
various state and local net operating loss carryforwards of $354 million, which
will expire in various jurisdictions in the years 2008 through
2026.  Of this amount, $93 million will be recorded as additional
paid-in capital when realized, consistent with SFAS 123R, as it is attributable
to tax deductions from exercises of stock options.  As of December 31,
2007, there is a valuation allowance of $1.2 million against capital loss
carryforwards and state and foreign net operating loss carryforwards, as we
believe it is more likely than not that such assets will not be realized in the
future.




For
financial statement purposes, we record 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 reporting purposes and on income tax returns.  The
significant components of our deferred tax assets and liabilities are as
follows:




December
      31,2007
            
            
            
            2006(in
      thousands)Deferred
      tax assets:Accounts
      receivable
            
            $
            398
            
            
            
            $
            774Inventory
            
            
            867
            
            
            
            
            860Depreciation/
      amortization
            
            
            103
            
            
            
            
            1,616Sales
      reserves
            
            
            4,202
            
            
            
            
            4,272Employee
      benefits
            
            
            5,767
            
            
            
            
            5,803Minimum
      pension liability
            
            
            1,932
            
            
            
            
            1,890Other
      reserves
            
            
            1,084
            
            
            
            
            2,057Loss
      carryforwards
            
            
            12,448
            
            
            
            
            29,840Federal
      benefit of reserves
            
            
            18,260
            
            
            
            
            –Licensing,
      net
            
            
            14,545
            
            
            
            
            14,421Other
            
            
            –
            
            
            
            
            183Total
      gross deferred tax assets
            
            
            59,606
            )
            
            
            
            61,716Less
      valuation allowance
            
            
            (1,234
            )
            
            
            
            (1,067
            )Net
      deferred tax assets
            
            
            58,372
            
            
            
            
            60,649Deferred
      tax liabilities:Unremitted
      foreign earnings
            
            
            –
            
            
            
            
            1,669Unrealized
      foreign exchange
            
            
            –
            
            
            
            
            10Total
      gross deferred tax liabilities
            
            
            –
            
            
            
            
            1,679Net
      deferred tax assets
            
            $
            58,372
            
            
            
            $
            58,970




F-31
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


8.      Income
Taxes (continued)




We
adopted the provisions of FIN 48 on January 1, 2007.  As a result of
its implementation, we recognized an increase in reserves for uncertain tax
positions of approximately $26 million, including interest (net of federal tax
benefit) and penalties.  This increase in reserves for uncertain tax
positions was offset, in part, by deferred tax assets established to recognize
the correlative impact of federal, state and local, and foreign uncertain tax
positions.  As a result of FIN 48's adoption, we recorded a net
reduction of approximately $19 million to our beginning-of-year retained
earnings balance.  Total unrecognized tax benefits at January 1, 2007
were approximately $36 million.




A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
is as follows:





(in
      thousands)Balance
      at January 1, 2007
            $
            36,000Additions
      based on tax positions related to the current year
            
            14,500Reductions
      based on tax positions related to the current year
            
            –Additions
      for tax positions of prior years
            
            1,600Reductions
      for tax positions of prior years
            
            –Settlements
      with taxing authorities
            
            –Expirations
      of statutes of limitations
            
            (200
            )Balance
      at December 31, 2007
            $
            51,900





If these
unrecognized tax benefits were recognized, related deferred tax assets of $17.4
million would be eliminated, resulting in a net $34.5 million favorable impact
on the effective tax rate. We do not expect the above unrecognized tax benefits
to significantly increase or decrease over the next twelve months.





The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state, local and foreign jurisdictions.  The
Company is no longer subject to U.S. federal, state and local, or foreign income
tax examinations by tax authorities for years through 2002.  New
York State has completed examinations of our tax returns through 2004
with no material adjustments.  Federal income tax returns for
2003 through 2006 are currently under examination with no proposed adjustments
to date.





We record
interest and penalties that may be incurred on unrecognized tax benefits as part
of tax expense. During the year ended December 31, 2007, these expenses
totaled $1.2 million. At December 31, 2007, we maintained $2.4 million of
accrued interest and $0.3 million of accrued penalties on unrecognized
tax benefits. To the extent interest and penalties are not assessed on our
uncertain tax positions, accrued amounts will be reduced and recorded as a
reduction of our income tax expense in the applicable future
periods.




9.
            Related
      Party Transactions




In
December 2005, Mr. Perlmutter sold Tangible Media, Inc. (“Tangible
Media”).  Tangible Media was wholly owned by Mr. Perlmutter and,
therefore, our affiliate prior to that sale.




Tangible
Media acts as our media consultant in placing certain of our advertising and
receives certain fees and commissions based on the cost of the placement of such
advertising.  Tangible Media received payments of fees and commissions
from us totaling approximately $487,000 in 2005.




Tangible
Media shares certain office space with us at our principal executive offices and
related overhead expenses, and Tangible Media has agreed to reimburse us for the
associated costs.  Tangible Media paid us approximately $106,000 in
2005 as reimbursement in accordance with that agreement.




F-32
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


10.
            Commitments
      and Contingencies




We have
commitments under various operating leases, primarily for office space, certain
of which extend through September 29, 2011.




Rent
expense related to non-cancelable operating leases amounted to $2.2 million,
$2.6 million and $3.3 million for the years ended December 31, 2007, 2006 and
2005, respectively.




Minimum
rental payments under non-cancelable operating leases as of December 31, 2007
are as follows (in thousands):





Year
      ending December 31:2008
            
            $
            2,6272009
            
            
            2,6112010
            
            
            2,2712011
            
            
            1,3682012
            
            
            91Total
            
            $
            8,968





Legal
Matters




On March
15, 2007, Stan Lee Media, Inc. (“SLM”) commenced an action against us in the
United States District Court for the Southern District of New
York.  The complaint alleges that SLM is the owner of intellectual
property rights in characters co-created by Stan Lee between 1941 and 1968 (the
“Creations”) while Mr. Lee was employed by our predecessors.  SLM
alleges that prior to the date Mr. Lee entered into a new employment agreement
with us in 1998, Mr. Lee transferred his interest in those characters to a
predecessor of SLM.  Mr. Lee has denied that any such transfer took
place.  Mr. Lee has an action pending in the United States District
Court for the Central District of California against the individuals acting as
the management of SLM, which asserts that any characters Mr. Lee co-created for
us or our predecessors were owned and continue to be owned by us and that those
individuals have no authority to take any actions in the name of
SLM.  The complaint in SLM’s action against us seeks a declaration of
SLM’s rights in the Creations, an accounting of the profits we have made based
on the Creations, the imposition of a constructive trust and
damages.  We believe SLM’s action to be without merit.




On March
30, 2007, Gary Friedrich and Gary Friedrich Enterprises, Inc. (“Friedrich”)
commenced a suit in the United States District Court for the Southern District
of Illinois against us, and numerous other defendants including Sony Pictures
Entertainment, Inc. Columbia Pictures Industries, Inc., Hasbro, Inc. and
Take-Two Interactive Software, Inc.  That suit has been transferred to
the Southern District of New York.  The complaint alleges that
Friedrich is the owner of intellectual property rights in the character Ghost
Rider and that we and other defendants have exploited the Ghost Rider character
in a motion picture and merchandise without Friedrich’s
consent.  Friedrich has asserted numerous claims including copyright
infringement, negligence, waste, state law misappropriation, conversion,
trespass to chattels, unjust enrichment, tortious interference with right of
publicity, and for an accounting.  We believe Friedrich’s claims to be
without merit.




We are
also involved in various other legal proceedings and claims incident to the
normal conduct of our business.  Although it is impossible to predict
the outcome of any legal proceeding and there can be no assurances, we believe
that our legal proceedings and claims, individually and in the aggregate, are
not likely to have a material adverse effect on our financial condition, results
of operations or cash flows.




F-33
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


11.
            Benefit
      Plans




We have a
401(k) plan covering substantially all of our employees. We may make
discretionary contributions to this plan.  No contributions were made
during the three year periods ended December 31, 2007, 2006 and
2005.




In
addition, in connection with the 1999 sale of the assets of our Fleer and Skybox
International subsidiaries, we retained certain liabilities related to the
Fleer/Skybox International Retirement Plan (the “Qualified Plan”) and the Skybox
Nonqualified Defined Benefit Plan (the “Nonqualifed Plan”), both of which are
defined benefit pension plans for employees of those subsidiaries (collectively,
the “Fleer/Skybox Plan”).  These plans have been amended to freeze the
accumulation of benefits and to prohibit new participants.  Based on
our assumptions, the accumulated benefit obligation was $20.4 million at
December 31, 2007 ($20.7 million at September 30, 2006) which exceeded assets by
$4.6 million at December 31, 2007 ($5.9 million at September 30,
2006).  The Nonqualified Plan is unfunded and has a net liability of
$1.0 million.  The current liability, which equals $0.1 million,
relates only to the Nonqualified Plan and represents the benefits expected to be
paid in the next 12 months from the Nonqualified Plan.  The remainder
of the Nonqualified Plan’s liability is noncurrent.  The Qualified
Plan is underfunded and has a net liability of $3.6 million.  Because
the Qualified Plan’s assets are sufficient to cover the expected benefits to be
paid from this plan in the next twelve months, its liabilities are
noncurrent.




During
the first quarter of 2007, we changed our measurement date from September 30 to
December 31 for the Fleer/Skybox Plan.  In accordance with the
measurement date transition provisions of SFAS 158, we remeasured benefit
obligations and plan assets as of January 1, 2007.  This remeasurement
did not have a material impact on the unfunded accumulated benefit obligation or
accumulated other comprehensive income.




Plan
administrative expenses for the years ended December 31, 2007, 2006 and 2005
were not significant. Pension costs are funded based on the recommendations of
independent actuaries, and amounted to $1.4 million and $1.0 million during 2007
and 2006, respectively.  We expect contributions for our pension plan
in 2008 to be approximately $1.1 million.  Expected benefit payments
are based on the same assumptions used to measure the year-end benefit
obligations.




We target
approximately 85% of our pension plan assets to be invested in a combination of
commercial paper, a stable return fund and an intermediate government income
fund, based on the risk tolerance characteristic of the plan, which may be
adjusted in the future to achieve our overall investment objective. The balance
of the plan assets are invested in various common stocks, including, from time
to time, our shares.  We develop our expected long-term rate of return
assumption based on the historical experience of our portfolio and the review of
projected returns by asset class.  The discount rate, determined at
each measurement date, is based on the Moody’s Aa Corporate Bond Index yield, a
commonly used index for the purpose of determining pension obligations. This
index is an average of the Utilities and Industrial bond indices.  The
plan provides for the payment of benefits at any time.




Our plan
asset allocations (at the measurement dates) and target allocations are
summarized as follows:





Percentage
      of
              Plan
      Assets
              at
      September 30, 2006
            Percentage
      of
              Plan
      Assets
              at
      December 31, 2007
            %
      Target
              Allocation
      in
              2008Equity
      securities
            25%
            11%
            15%Debt
      securities
            75%
            89%
            85%





F-34
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


11.           Benefit
Plans (continued)




The
following table reconciles the projected benefit obligation, plan assets, funded
status, and net pension liability for the Fleer/Skybox Plan.  The 2007
column includes the twelve months period from January 1, 2007 to December 31,
2007.  The remeasure column includes the three-month period from
October 1, 2006 to December 31, 2006 which reflects the change in measurement
date from September 30 to December 31.  The 2006 column includes the
twelve month period from October 1, 2005 to September 30, 2006.





2007
            
            Remeasure
            
            2006(in
      thousands)Accumulated
      Benefit Obligation, End of Period
            $
            20,432
            
            $
            20,645
            
            $
            20,680Change
      in Projected Benefit ObligationProjected
      benefit obligation, beginning of period
            $
            20,645
            
            $
            20,680
            
            $
            21,711Service
      cost
            
            –
            
            
            –
            
            
            –Interest
      cost
            
            1,152
            
            
            285
            
            
            1,141Plan
      amendments
            
            –
            
            
            –
            
            
            –Assumption
      changes
            
            –
            
            
            –
            
            
            –Actuarial
      (gain)/loss
            
            (31
            )
            
            –
            
            
            (595
            )Benefits
      paid
            
            (1,334
            )
            
            (320
            )
            
            (1,577
            )Projected
      benefit obligation, end of period
            $
            20,432
            
            $
            20,645
            
            $
            20,680Change
      in plan assetsPlan
      assets at fair value, beginning of period
            $
            14,891
            
            $
            14,777
            
            $
            14,414Actual
      return on plan assets
            
            837
            
            
            212
            
            
            976Company
      contributions
            
            1,446
            
            
            222
            
            
            964Benefits
      paid
            
            (1,334
            )
            
            (320
            )
            
            (1,577
            )Plan
      assets at fair value, end of period
            $
            15,840
            
            $
            14,891
            
            $
            14,777Funded
      status
            $
            (4,592
            )
            $
            (5,754
            )
            $
            (5,903
            )Contributions
      between measurement date and fiscal year-end
            
            –
            
            
            –
            
            
            223Net
      pension (liability) at end of period
            $
            (4,592
            )
            $
            (5,754
            )
            $
            (5,680
            )Amounts
      recognized in the statement of financial positionNoncurrent
      assets
            $
            –
            
            $
            
            
            $Current
      liabilities
            
            (105
            )
            
            (103
            )
            
            (103
            )Noncurrent
      liabilities
            
            (4,487
            )
            
            (5,651
            )
            
            (5,577
            )Net
      pension (liability) at end of period
            $
            (4,592
            )
            $
            (5,754
            )
            $
            (5,680
            )Amounts
      recognized in accumulated other comprehensive incomeNet
      transition obligation
            $
            –
            
            $
            –
            
            $
            –Prior
      service cost (credit)
            
            (365
            )
            
            (419
            )
            
            (433
            )Net
      actuarial loss
            
            6,722
            
            
            6,833
            
            
            6,860$
            6,357
            
            $
            6,414
            
            $
            6,427





F-35
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


11.           Benefit
Plans (continued)




The
components of net periodic pension costs and the significant assumptions used
are summarized below:





2007
            
            
            2006
            
            
            2005(dollars
      in thousands)Total
      cost for plan yearService
      cost
            $
            –
            
            $
            –
            
            $
            –Interest
      cost
            
            1,152
            
            
            1,141
            
            
            1,139Expected
      return on plan assets
            
            (972
            )
            
            (922
            )
            
            (892
            )Amortization
      of:Unrecognized
      net loss
            
            215
            
            
            244
            
            
            183Unrecognized
      prior service cost
            
            (54
            )
            
            (54
            )
            
            (54
            )Unrecognized
      net asset obligation
            
            –
            
            
            –
            
            
            –Net
      periodic pension cost
            $
            341
            
            $
            409
            
            $
            376Measurement
      date
            
            12/31/2007
            
            
            9/30/2006
            
            
            9/30/2005Assumptions
      used for annual expense:Discount
      rate
            
            5.70%
            
            
            5.40%
            
            
            5.75%Expected
      return on plan assets
            
            6.50%
            
            
            6.50%
            
            
            6.50%Rate
      of compensation increase
            
            N/A
            
            
            N/A
            
            
            N/AAssumptions
      used for year-end disclosure:Discount
      rate
            
            5.88%
            
            
            5.70%
            
            
            5.40%Rate
      of consumption increase
            
            N/A
            
            
            N/A
            
            
            N/A





We expect
to contribute $1.1 million to the plan in 2008.




Annual
expected benefit payments are as follows (in thousands):




2008
            $
            1,3352009
            
            1,3262010
            
            1,3962011
            
            1,4112012
            
            1,4922013-2017
            
            7,923





The
estimated net actuarial loss and prior service cost for the plan that will be
amortized from accumulated other comprehensive income into net periodic benefit
cost during the 2008 fiscal year are $0.2 million and ($0.1 million),
respectively.  There is no transition obligation to be amortized in
2008.




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




F-36
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


12.
            Segment
      Information




We
operate our businesses in four segments: Licensing, Publishing, Toys and Film
Production.




Licensing
            
            
            Publishing
            
            
            Toys
            
            
            Film
      Production
            
            
            Corporate
            
            
            Total(in
      thousands)Year  ended
      December 31, 2007Net
      sales
            $
            272,722
            
            $
            125,657
            
            $
            87,428
            
            $
            –
            
            $
            –
            
            $
            485,807Operating
      income (loss)
            
            196,136
            
            
            53,524
            
            
            54,725
            
            
            (7,537
            )
            
            (22,419
            )
            
            274,429Total
      capital expenditures
            
            142
            
            
            –
            
            
            2,297
            
            
            220
            
            
            –
            
            
            2,659Total
      identifiable assets
            
            351,788
            
            
            71,409
            
            
            115,274
            
            
            278,887
            
            
            –
            
            
            817,358Year  ended
      December 31, 2006Net
      sales
            $
            127,261
            
            $
            108,464
            
            $
            116,073
            
            $
            –
            
            $
            –
            
            $
            351,798Operating
      income (loss)
            
            77,541
            
            
            44,077
            
            
            21,098
            
            
            (7,464
            )
            
            (22,692
            )
            
            112,560Total
      capital expenditures
            
            1,492
            
            
            –
            
            
            14,794
            
            
            –
            
            
            –
            
            
            16,286Total
      identifiable assets
            
            366,454
            
            
            69,710
            
            
            148,695
            
            
            39,006
            
            
            –
            
            
            623,865Year  ended
      December 31, 2005Net
      sales
            $
            230,063
            
            $
            92,455
            
            $
            67,989
            
            $
            –
            
            $
            –
            
            $
            390,507Operating
      income (loss)
            
            143,357
            
            
            36,343
            
            
            15,548
            
            
            –
            
            
            (24,081
            )
            
            171,167Total
      capital expenditures
            
            1,348
            
            
            –
            
            
            2,941
            
            
            –
            
            
            –
            
            
            4,289Total
      identifiable assets
            
            389,382
            
            
            67,439
            
            
            86,330
            
            
            30,395
            
            
            –
            
            
            573,546







Licensing
Segment




The
Licensing segment, which includes the operations of the Joint Venture, licenses
our characters for use in a wide variety of products and media, the most
significant of which are described below.  Identifiable assets for the
Licensing segment as of December 31, 2007 and 2006 include goodwill of $298.4
million and $294.6, respectively.  Goodwill increased as a result of a
deferred tax asset adjustment attributable to state net operating losses (see
Note 8).




Consumer
Products




We
license our characters for use in a wide variety of consumer products, including
toys, apparel, interactive games, electronics, homewares, stationery, gifts and
novelties, footwear, food and beverages and collectibles.  Revenues
from these activities are classified in our Licensing segment, other than
revenues from Hasbro, Inc., which are classified in our Toy
segment.




Studio
Licensing




Feature Films.We
have licensed some of our characters to major motion picture studios for use in
motion pictures. For example, we currently have a license with Sony to produce
motion pictures featuring the Spider-Man family of characters.  We
also have outstanding licenses with studios for a number of our other
characters, including The Fantastic Four, X-Men, Daredevil/Elektra, Ghost Rider,
Namor the Submariner and The Punisher.  Under these licenses, we
retain control over merchandising rights and retain more than 50% of
merchandising-based royalty revenue.




F-37
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007




12.           Segment
Information (continued)




Television Programs.We
license our characters for use in television programs.  Several
live-action and animated television shows based on our characters are in various
stages of development including live-action television programming based on Moon
Knight and animated programming based on Iron Man, X-Men and the Incredible
Hulk.




Made-for-DVD Animated Feature
Films. We have licensed some of our characters to an entity controlled by
Lions Gate Entertainment Corp. to produce up to ten feature-length animated
films for distribution directly to the home video market. The first two animated
features, Ultimate Avengersand Ultimate Avengers
2, were released in 2006.  The animated features The Invincible Iron Man and Doctor Strange werereleased
in 2007.




Destination-Based
Entertainment




We
license our characters for use at theme parks, shopping malls and special
events.  For example, we have licensed some of our characters for use
at Marvel Super Hero Island, part of the Islands of Adventure theme park at
Universal Orlando in Orlando, Florida, and for use in a Spider-Man attraction at
the Universal Studios theme park in Osaka, Japan.  We have also
licensed our characters for the development of a major theme park in
Dubai.




Promotions




We
license our characters for use in short-term promotions of other companies’
products and services.  Recent examples are a license to Proctor and
Gamble for the appearance of Spider-Man on Pampers-brand training pants and swim
pants and a license to Philips Consumer Electronics BV for the appearance of The
Incredible Hulk in a television commercial and in-store advertisements for
Philips television sets.




Publications




Our
Licensing segment licenses our characters to publishers located outside the
United States for use in foreign-language comic books and trade paperbacks and
to publishers worldwide for novelizations and a range of coloring and activity
books.




Publishing
Segment




The
Publishing segment creates and publishes comic books and trade paperbacks
principally in North America.  Marvel has been publishing comic books
since 1939 and has developed a roster of more than 5,000 Marvel
Characters.  Our titles include Spider-Man, X-Men, Fantastic Four,
Iron Man, the Incredible Hulk, Captain America and Ghost Rider.  In
addition to revenues from the sale of comic books and trade paperbacks, the
Publishing segment derives revenues from sales of advertising and subscriptions
and from other publishing activities, such as custom comics and online
activities.  Identifiable assets for the Publishing segment as of
December 31, 2007 and 2006 include goodwill of $42.5 million and $41.9 million,
respectively.  Goodwill increased as a result of a deferred tax asset
adjustment attributable to state net operating losses (see Note 8).




F-38
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


12.           Segment
Information (continued)




Toy
Segment




In
January 2006, we entered into a license agreement with Hasbro under which Hasbro
has the exclusive right to make action figures, plush toys and role-play toys,
and the non-exclusive right to make several other types of toys, featuring our
characters.  The license gives Hasbro the right to sell those toys at
retail from January 1, 2007 through December 31, 2011.  In some cases,
however, Hasbro was permitted to sell toys at retail at the end of
2006.  The license is subject to extension in the event that
entertainment productions featuring our characters are not released according to
an agreed-upon schedule.  We also entered into a services agreement
with Hasbro under which we have agreed to provide brand expertise, marketing
support and other services in connection with the licensed toys.  In
2006, royalty and service fee income recognized from Hasbro aggregated $5.2
million.  Most of the Toy segment’s 2006 sales, however, came from
toys that we produced and sold ourselves.




During
2007, our Toy segment’s sales consist primarily of royalties and service fees
from Hasbro.  The Toy segment also generates revenue from sales of
licensed-in properties, such as Curious George.




Film
Production Segment




The
expansion of our studio operations to include feature films that we are
producing ourselves has resulted in the creation of the Film Production segment,
which we began to present separately in the fourth quarter of
2006.  Previously, Marvel Studios’ operations related solely to the
licensing of our characters to third-party motion picture and television
producers.  Those licensing activities were included, and are still
included, in the Licensing segment. However, the operations of developing and
producing our own theatrical releases are reported in our Film Production
segment, as these operations are inherently different than that of licensing our
characters.  Our self-produced films are primarily financed with our
$525 million film facility and our Iron Man and Hulk facilities, which are
described in Note 4. The first two films under production by the Film Production
segment, Iron Man and
The Incredible Hulk,
are scheduled for release in May and June 2008,
respectively.  Operating costs for our Film Production segment consist
primarily of employee compensation and $0.9 million related to the decline in
the fair value of the interest rate cap associated with our film facility, which
was partially offset by realized gains of $2.1 million generated from forward
contracts for the Canadian dollar.  Excluded from these costs is $1.0
million of capitalized overhead related to the films in
production.  Identifiable assets for the Film Production segment as of
December 31, 2007 and 2006 include goodwill of $5.3 million and 5.2 million,
respectively.





The Film
Production segment operations are expected to look very different in 2008, when
we release our first self-produced films. At that time, we will begin
recognizing revenue.  As we recognize revenue for a particular
theatrical release, we will amortize the related capitalized film inventory in
the proportion that the recognized revenue bears to the total estimated lifetime
revenues of the theatrical release.




F-39
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007


12.           Segment
Information (continued)







Revenue
      by Geographic Area(in
      thousands)2007
            
            
            2006
            
            
            2005U.S.
            
            
            Foreign
            
            
            U.S.
            
            
            Foreign
            
            
            U.S.
            
            
            ForeignLicensing
            $
            178,534
            
            $
            94,188
            
            $
            83,955
            
            $
            43,306
            
            $
            181,959
            
            $
            48,104Publishing
            
            106,858
            
            
            18,799
            
            
            90,924
            
            
            17,540
            
            
            77,312
            
            
            15,143Toys*
            
            53,100
            
            
            34,328
            
            
            82,171
            
            
            33,902
            
            
            47,695
            
            
            20,294Total
            $
            338,492
            
            $
            147,315
            
            $
            257,050
            
            $
            94,748
            
            $
            306,966
            
            $
            83,541*
      $38.5 million and $4.4 million of U.S. toy revenue and $32.4 million and
      $0.8 million of foreign toy revenue for 2007 and 2006, respectively, is
      attributable to royalties and service fees generated by
      Hasbro.  $37.1 million of the U.S. toy revenue and $14.7 million
      of the foreign toy revenues for 2005 are attributable to royalties and
      service fees from toy sales generated by
TBW.







13.
            Subsequent
      Event




Subsequent
to December 31, 2007, we purchased approximately 0.4 million shares of our
common stock at a cost of $9.9 million.  We also
announced, on February 19, 2008, that our Board of Directors had
increased our share repurchase authorization by $100 million, adding to the
$28.2 million then remaining under our prior share repurchase
authorization, and extended the authorization through March 1,
2010.




During
January 2008, we received settlement payments totaling $22.5 million from
certain licensees in connection with the early termination of their
agreements.




In
February 2008, we entered into a forward currency contract with a financial
institution to sell 12.5 million of Canadian dollars on September 30, 2008 in
exchange for $12.4 million.




F-40
 INDEX


MARVEL
ENTERTAINMENT, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 December
31, 2007




14.
            Quarterly
      Financial Data (Unaudited)




Summarized
quarterly financial information for the years ended December 31, 2007 and 2006
is as follows:





2007
            
            2006Quarter
      Ended
            
            March
      31
            
            June
      30
            
            September
      30
            
            December
      31
            
            March
      31
            
            June
      30
            
            September
      30
            
            December
      31*
            
            
            
            **
            
            ***(in
      thousands, except per share data)Net
      sales
            
            $
            151,402
            
            $
            101,475
            
            $
            123,642
            
            $
            109,288
            
            $
            90,058
            
            $
            84,363
            
            $
            92,161
            
            $
            85,216Net
      income
            
            
            46,842
            
            
            29,087
            
            
            36,268
            
            
            27,626
            
            
            17,509
            
            
            16,297
            
            
            13,200
            
            
            11,698Basic
      net income per common share
            
            $
            0.56
            
            $
            0.35
            
            $
            0.47
            
            $
            0.36
            
            $
            0.20
            
            $
            0.20
            
            $
            0.17
            
            $
            0.14Dilutive
      net income per common share
            
            $
            0.54
            
            $
            0.34
            
            $
            0.45
            
            $
            0.35
            
            $
            0.19
            
            $
            0.19
            
            $
            0.16
            
            $
            0.14





*The
quarterly financial data for the quarter ended March 31, 2007 includes an
adjustment to beginning of the year deferred tax assets, which resulted in a
discrete income tax charge of $2.6 million, a $3.1 million decrease to
additional paid-in-capital and a $4.4 million increase to
goodwill.  The adjustment to additional paid-in-capital is presented
on the accompanying statement of stockholders’ equity and comprehensive income
within tax benefit of stock options exercised, net.  The net income
for the quarter ended March 31, 2007 also includes an adjustment to record a
$1.9 million non-recurring credit to selling, general and administrative
expenses associated with pension accounting for the Fleer/Skybox
Plan.  Diluted net income per common share in the first quarter of
2007 incorporates a correction to our weighted average number of diluted shares
outstanding that was announced on May 24, 2007.  We do not believe
that any of these adjustments are material to this quarter or any previously
reported periods.





**The
quarterly financial data for the quarter ended September 30, 2007 includes
unusually high amounts ($16.8 million) received in settlements of licensing
audit claims that are reflected in net sales.  The quarterly financial
data also includes a discrete tax benefit of $1.7 million, primarily due to a
reduction of deferred tax liabilities related to our Hong Kong subsidiary, which
we do not believe is material to this quarter or any previously reported
periods.





***Quarterly
financial data for the quarter ended December 31, 2007 includes out-of-period
adjustments of $2.8 million in additional selling, general and administrative
expense to correct the amount of royalties payable to actors for the use of
their likeness in products over the period 2004 to 2006.  The
quarterly financial data also includes $1.9 million in additional selling,
general and administrative expense to correct the amount of royalties payable to
actors for the use of their likeness in products in the first and third quarters
of 2007.  We do not believe these adjustments are material to this
quarter or any previously reported periods.





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





F-41
 INDEX




SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS







Description
              
              
              Balance
      At
                Beginning
      of
                Period
              
              
              Charged
      to
                Sales
      or Costs
                and
      Expenses
              
              
              Charged
      to
                Other
                Accounts
              
              
              Deductions
                (3)
              
              
              Balance
      at
                End
      of
                Period(in
      thousands)Year
      Ended December 31, 2007Allowances
      included in Accounts Receivable, Net:Doubtful
      accounts—current
              
              $
              2,107
              
              $
              (453
              )(2)
              $
              –
              
              $
              553
              
              $
              1,101Doubtful
      accounts—non-current
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Advertising,
      markdowns, volume discounts and other
              
              
              18,504
              
              
              21,414
              (1)
              
              (1,981
              )
              
              22,918
              
              
              15,019Valuation
      allowances against deferred taxes
              
              
              1,067
              
              
              167
              
              
              –
              
              
              –
              
              
              1,234Year
      Ended December 31, 2006Allowances
      included in Accounts Receivable, Net:Doubtful
      accounts—current
              
              $
              3,993
              
              $
              (1,877
              )(2)
              $
              –
              
              $
              (9
              )
              $
              2,107Doubtful
      accounts—non-current
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Advertising,
      markdowns, volume discounts and other
              
              
              12,216
              
              
              23,366
              (1)
              
              –
              
              
              (17,078
              )
              
              18,504Valuation
      allowances against deferred taxes
              
              
              2,610
              
              
              150
              
              
              (1,693
              )
              
              –
              
              
              1,067Year
      Ended December 31, 2005Allowances
      included in Accounts Receivable, Net:Doubtful
      accounts—current
              
              
              4,851
              
              
              (451
              )(2)
              
              –
              
              
              (407
              )
              
              3,993Doubtful
      accounts—non-current
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Advertising,
      markdowns, volume discounts and other
              
              
              11,167
              
              
              10,415
              (1)
              
              –
              
              
              (9,366
              )
              
              12,216Valuation
      allowances against deferred taxes
              
              
              887
              
              
              1,866
              
              
              –
              
              
              (143
              )
              
              2,610





(1)  Charged
to sales.


(2)  Charged
to (recovery of) costs and expenses.


(3)  Allowances
utilized and/or paid.