<PAGE>
 
================================================================================

                      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, 1998
 
                                      OR
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934
 
                   For the transition period from     to
 
                          Commission File No. 1-13638
                           MARVEL ENTERPRISES, INC.
            (Exact name of Registrant as specified in its charter)
 
                       (formerly known as Toy Biz, Inc.)
 
               Delaware                              13-3711775
       (State of incorporation)            (I.R.S. employer identification
                                                       number)
 
                             387 Park Avenue South
                           New York, New York 10016
         (Address of principal executive offices, including zip code)
 
                                (212) 696-0808
             (Registrant's telephone number, including area code)
 
                               ----------------
          Securities registered pursuant to Section 12(b) of the Act:
 
                    Common Stock, par value $.01 per share
 
          Securities registered pursuant to Section 12(g) of the Act:
 
  8% Cumulative Convertible Exchangeable Preferred Stock, par value $.01 per
                                     share
                Plan Warrants for the purchase of Common Stock
               Class A Warrants for the purchase of Common Stock
  Class B Warrants for the purchase of 8% Cumulative Convertible Exchangeable
                                Preferred Stock
               Class C Warrants for the purchase of Common Stock
 
   Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
   The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of March 22, 1999 was
$81,355,950, based on a price of $6.25 per share, the closing sales price for
the Registrant's Common Stock as reported in the New York Stock Exchange
Composite Transaction Tape on that date.
 
   As of March 25, 1999, there were 33,532,127 outstanding shares of the
Registrant's Common Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE

    None.
================================================================================
 


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                               TABLE OF CONTENTS
 
<TABLE>
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 PART I..................................................................   1
    ITEM 1.   BUSINESS..................................................    1
    ITEM 2.   PROPERTIES................................................   18
    ITEM 3.   LEGAL PROCEEDINGS.........................................   18
    ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......   19

 PART II.................................................................  20
    ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS.......................................   20
    ITEM 6.   SELECTED FINANCIAL DATA...................................   21
    ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS.......................   21
    ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
              ABOUT MARKET RISK.........................................   28
    ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............   28
    ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE.......................   28

 PART III................................................................  29
    ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........   29
    ITEM 11.  EXECUTIVE COMPENSATION....................................   32
    ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT................................................   40
    ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............   44

 PART IV.................................................................  45
    ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
              FORM 8-K..................................................   45

 SIGNATURES..............................................................  50
</TABLE>
 
                                       i
<PAGE>
 
                          FORWARD-LOOKING STATEMENTS
 
   This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act (the "Securities Act") and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have
based these statements on our beliefs and assumptions, based on information
currently available to us. These forward-looking statements are subject to
risks and uncertainties. Forward-looking statements include the information
concerning our possible or assumed future results of operations set forth
under the sections entitled "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
   Forward-looking statements are not guarantees of performance. Our future
results and requirements may differ materially from those described in the
forward-looking statements. Many of the factors that will determine these
results and requirements are beyond our control. In addition to the risks and
uncertainties discussed in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," investors should
consider those discussed under "Risk Factors" and, among others, the
following:
 
  .  our potential need for additional financing,
 
  .  our potential inability to integrate the operations of Marvel
     Entertainment Group, Inc. with those of Toy Biz, Inc.,
 
  .  our potential inability to successfully implement our business strategy,
 
  .  a decrease in the level of media exposure or popularity of our
     characters resulting in declining revenues from products based on those
     characters,
 
  .  the lack of commercial success of properties owned by major
     entertainment companies that have granted us toy licenses,
 
  .  the lack of consumer acceptance of new product introductions,
 
  .  the imposition of quotas or tariffs on toys manufactured in China as a
     result of a deterioration in trade relations between the U.S. and China,
 
  .  changing consumer preferences,
 
  .  production delays or shortfalls,
 
  .  continued pressure by certain of our major retail customers to
     significantly reduce their toy inventory levels,
 
  .  the impact of competition and changes to the competitive environment on
     our products and services,

  .  changes in technology (including uncertainties associated with Year 2000
     compliance),

  .  changes in governmental regulation, and
 
  .  other factors detailed from time to time in our filings with the
     Securities and Exchange Commission.
 
   These forward-looking statements speak only as of the date of this report.
We do not intend to update or revise any forward-looking statements to reflect
events or circumstances after the date of this report, including changes in
our business strategy or planned capital expenditures, or to reflect the
occurrence of unanticipated events.
 
                                      ii
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
   Unless the context otherwise requires: (i) the term the "Company" and the
term "Marvel" each refer to Marvel Enterprises, Inc. (formerly Toy Biz, Inc.),
a Delaware corporation, and its subsidiaries; (ii) the term "MEG" refers to
Marvel Entertainment Group, Inc., a Delaware corporation, and its
subsidiaries, prior to the consummation of the Merger, as defined below, and
its emergence from bankruptcy; (iii) the term "Toy Biz, Inc." refers to the
Company prior to the consummation of the Merger; (iv) the term "Marvel
Licensing" refers to the Marvel Licensing business division of the Company;
(v) the term "Marvel Publishing" refers to the Marvel Publishing business
division of the Company; (vi) the term "Toy Biz" refers to the Toy Biz
business division of the Company; and (vii) the term "Panini SpA" refers to
Panini, S.p.A., an Italian corporation and a wholly-owned subsidiary of the
Company. Unless otherwise indicated, the statement of operations data and
statement of cash flows data included in this Report do not include (i) Fleer
Corp., Frank H. Fleer Corp. and SkyBox International Inc. (each a wholly-owned
subsidiary of the Company), substantially all of the assets of which the
Company sold on February 11, 1999 (the "Fleer Sale"), or (ii) Panini SpA,
which the Company has decided to dispose of. Certain of the characters and
properties referred to in this Report are subject to copyright and/or
trademark protection.
 
Background
 
   On October 1, 1998, the Company acquired MEG by means of a merger between
MEG and the Company's wholly-owned subsidiary MEG Acquisition Corp. (the
"Merger"). Upon consummation of the Merger, the Company changed its name from
"Toy Biz, Inc." to "Marvel Enterprises, Inc." The Merger was part of the
Fourth Amended Joint Plan of Reorganization for MEG that was confirmed by the
United States District Court for the District of Delaware, which had
jurisdiction of MEG's chapter 11 case. MEG's chapter 11 case had begun in
December 1996 with MEG's filing of a voluntary petition for bankruptcy
protection. Prior to the reorganization, MEG was a principal stockholder of
Toy Biz, Inc. See "--The Reorganization."
 
   In order to finance a portion of the consideration required to consummate
the Merger and certain other transactions contemplated by the plan of
reorganization, the Company borrowed $200 million (the "Bridge Loan") from UBS
AG, Stamford Branch ("UBS"). The Company used a portion of the proceeds from
an offering, completed on February 25, 1999 (the "Notes Offering"), of $250
million of 12% senior notes due 2009 (the "Notes") to repay the Bridge Loan.
UBS is an affiliate of Warburg Dillon Read LLC, one of the placement agents in
the Notes Offering.
 
General
 
   The Company is one of the world's most prominent character-based
entertainment companies, with a proprietary library of over 3,500 characters.
The Company operates in the licensing, comic book publishing and toy
businesses in both domestic and international markets. The Company's library
of characters includes Spider-Man, X-Men, Captain America, Fantastic Four and
The Incredible Hulk and is one of the oldest and most recognizable collections
of characters in the entertainment industry. Management believes that the
potential of the Company's library remains largely unrealized.
 
   The Company's characters have been developed through a long history of
comic book plots and storylines which give each of them their own personality,
context and depth. In addition, the Company's characters exist in the "Marvel
Universe," a fictitious universe which provides a unifying historical and
contextual background for the characters and storylines. The "Marvel Universe"
concept permits the Company to use some of its more popular characters to
enhance the exposure of its lesser-known characters. Management believes that
the "Marvel Universe" concept and the Company's well-developed characters and
storylines make the Company's library difficult to 
 
                                       1
<PAGE>
 
replicate and well-suited for television programming, feature films and other
media, which generate licensing and toy demand.

   The Company's business is divided into three integrated and complementary
operating divisions: Marvel Licensing, Marvel Publishing and Toy Biz.
 
 Marvel Licensing
 
   Marvel Licensing licenses the Company's characters for use in a wide
variety of consumer products. Marvel Licensing also receives fees from the
sale of licenses to a variety of media, including television, feature films
and destination-based entertainment.
 
 Marvel Publishing
 
   Marvel Publishing is one of the world's leading publishers of comic books.
Marvel Publishing has published comic books based upon the Company's
characters for over 60 years, including some of the world's most popular comic
book titles. The Company also licenses the right to publish comic books based
on its characters in numerous foreign countries and in multiple languages
worldwide. The comic book publishing business provides for both the creation
of new characters and storylines and the maintenance of a loyal comic book
audience. Management believes that a substantial portion of this audience
constitutes customers for the Company's toys and other licensed products.
 
 Toy Biz
 
   Toy Biz designs, develops, markets and distributes both innovative and
traditional toys in the United States and internationally. Toy Biz's toy
products fall into three categories: toys based on the Company's characters,
proprietary toys designed and developed by Toy Biz, and toys based on
properties licensed to the Company by third parties. Prior to MEG's
bankruptcy, Toy Biz, Inc. derived a large portion of its revenues from
products based on characters licensed from MEG. In recent years, Toy Biz has
diversified its product line by developing a proprietary line of toys,
including three of the four top-selling large girls promotional dolls in 1997,
as well as by developing toys under licensing agreements with non-affiliated
licensors such as World Championship Wrestling (WCW/NWO), Universal Studios
(including Jurassic Park) and Sony Pictures (including Godzilla). In 1998,
approximately 65% of the Company's net toy sales were generated from products
not based on Marvel characters. Management believes that feature films or
television programming based on the Company's characters will increase
consumer interest in those characters, creating revenue opportunities for the
Company through sales of action figures and other toy merchandise. Management
estimates that toy products based on feature films, television shows, books
and other entertainment media account for more than 40% of all sales in the
toy industry.
 
Marvel Licensing
 
   Marvel Licensing licenses the Company's characters for use in a wide
variety of consumer products, including apparel, costumes, children's
sleepwear, party goods, snack foods, video games, collectibles, posters,
footwear, backpacks and linens. Marvel Licensing also receives fees from the
sale of licenses to a variety of media, including television, feature films
and destination-based entertainment.
 
   The licensing industry has witnessed considerable growth in recent years.
Licensing is now a standard cash generating component of any major media
event. In addition, the Company believes that toy companies will increase
their dependence on licensed products in the future and that toy products
based on movies, television shows, books and other entertainment media will
account for a substantial portion of all toy sales.
 
   The following are examples of media exposure and licensing opportunities
that Marvel Licensing has generated for the Company's characters:
 
                                       2
<PAGE>
 
 Television Programs
 
   Marvel Licensing licenses the Company's characters for use in popular
television programs, including Spider-Man, which has appeared on the Fox Kids
Television Network since 1994, and X-Men, which has appeared on the Fox Kids
Television Network since 1992. In addition, The Incredible Hulk, Fantastic Four,
Iron Man and Silver Surfer have aired on syndicated television from time to time
in the past. Marvel Licensing recently granted a license for up to 26 new
episodes of Spider-Man and at least 21 new episodes of Avengers to the Fox Kids
Television Network which are scheduled for broadcast beginning in fall 1999.
 
 Feature Films
 
   Marvel Licensing has licensed the Company's characters for use in major
motion pictures. For example, in March 1999, the Company licensed to Sony
Pictures the right to create motion pictures based on the Spider-Man
character. The Company received a non-refundable advance against future
royalties due from Sony Pictures on revenues generated by the first motion
picture to be produced under the license. Sony will be required to make
additional advances against royalties due on revenues generated by subsequent
motion pictures. The Company also granted Sony Pictures rights to produce
television programming based on Spider-Man following the release by Sony of
the first Spider-Man motion picture. The Company and Sony Pictures have also
agreed to jointly pursue merchandise licensing opportunities for motion
picture- and television-related merchandise through a jointly owned limited
partnership. The Company has retained all other licensing rights with respect
to the Spider-Man character.
 
   During MEG's bankruptcy, two motion pictures featuring some of the
Company's lesser-known characters were released successfully: in 1997, Sony
Pictures released Men in Black and in 1998, New Line Cinema released Blade.
Management believes that MEG was unable to fully exploit the licensing
opportunities from Blade due to its bankruptcy. In addition, contrary to the
Company's current strategy of retaining merchandising and other rights, the
merchandising, licensing and ancillary rights to Men in Black had been granted
to Sony Pictures prior to the acquisition of these characters by MEG. The
Company currently has licenses with Twentieth Century Fox to produce motion
pictures featuring X-Men, Fantastic Four and Silver Surfer. All three proposed
films have written scripts and are in varying stages of development. New Line
Cinema has announced that it intends to produce a sequel to Blade. In
addition, the Company currently has outstanding licenses with various film
studios for a number of its other characters and additional discussions are
ongoing. Under these licenses, the Company generally retains control over
merchandising rights and not less than 50% of movie-based merchandising
revenues.
 
 Destination-Based Entertainment
 
   Marvel Licensing licenses the Company's characters for use at theme parks,
shopping malls, special events and restaurants. For example, Marvel Licensing
has licensed the Company's characters for use as part of an attraction at the
Universal Studios Theme Park in Orlando, Florida. Universal Studios is
expected to unveil "Marvel Super Hero Island" featuring Spider-Man, The
Incredible Hulk and a number of the Company's other characters in 1999.
 
 On-line Media
 
   Marvel Licensing has recently developed an on-line presence for the
Company's characters through the Company's "Marvel.com" and related websites,
including the introduction of electronic comics and access to the Company's
top writers and artists. The Company's websites have received several of
America Online's quarterly Members' Choice Awards, which are presented to the
50 most popular websites among America Online's members, and also received the
KidScreen Magazine "Best Innovations" award for 1997.
 
                                       3
<PAGE>
 
 Non-Toy Merchandise
 
   Marvel Licensing licenses the Company's characters for use in a wide
variety of consumer products, including apparel, costumes, children's
sleepwear, party goods, snack foods, video games, collectibles, posters,
footwear, backpacks and linens.

Marvel Publishing
 
   Marvel Publishing is one of the world's leading publishers of comic books.
 
   In recent years, the domestic comic book publishing market increased to
levels which the Company believes were speculative and unsustainable. In 1995,
the market began to decline primarily as a result of reduced readership, lower
speculative purchases and lower selling prices, which in turn caused a
contraction in the number of comic book specialty stores.
 
 Comic Books
 
   Marvel Publishing has been publishing comic books since 1939 and has
developed a roster of more than 3,500 characters, including the following
popular characters: Spider-Man; X-Men (including Wolverine, Nightcrawler,
Colossus, Storm, Cyclops, Rogue, Bishop and Gambit); Captain America;
Fantastic Four (including Mr. Fantastic, Human Torch, Invisible Woman and The
Thing); The Incredible Hulk; Thor; Silver Surfer; Daredevil; Iron Man; Dr.
Strange and Ghost Rider. The Company's characters exist in the "Marvel
Universe," a fictitious universe which provides a unifying historical and
contextual background for the storylines. Marvel Publishing's titles feature
classic Marvel super heroes, newly developed Marvel characters, and characters
created by other entities and licensed to Marvel Publishing.
 
   Marvel Publishing's approach to the Marvel characters is to present a
contemporary drama suggestive of real people with real problems. This enables
the characters to evolve, remain fresh, and, therefore, attract new and retain
old readers in each succeeding generation. The "Marvel Universe" concept
permits Marvel Publishing to use the popularity of its characters to introduce
a new character in an existing Marvel super heroes comic book or to develop
more fully an existing but lesser known character. In this manner, formerly
lesser known characters such as Thunderbolts and Wolverine have been developed
and are now popular characters in their own right and are featured in their
own monthly comic books. The "Marvel Universe" concept also allows Marvel
Publishing to use its more popular characters to make "guest appearances" in
the comic books of lesser-known or newer characters to attempt to increase the
circulation of a particular issue or issues.
 
 Comic Book Editorial Process
 
   Marvel Publishing's full-time editorial staff consists of an editor-in-
chief, creative director, art director and approximately 18 editors, associate
editors and assistant editors who oversee the quality and consistency of the
artwork and editorial copy and manage the production schedule of each issue.
The production of each issue requires the editors to coordinate, over a six-
to nine-month period, the activities of a writer, a pencil artist, an inker, a
colorist and a printer. The majority of this work is performed by third
parties outside of Marvel Publishing's premises.
 
   The artists and writers include freelancers who generally are paid on a
per-page basis. They are eligible to receive incentives or royalties based on
the number of copies sold (net of returns) of the comic books in which their
work appears. Marvel Publishing has entered into agreements with certain
artists and writers under which those persons have agreed to provide their
services to Marvel Publishing on an exclusive basis, generally for a period of
one to three years. Management believes that the financial terms of these
agreements are competitive within the industry and are consistent with current
and expected levels of comic book sales.
 
                                       4
<PAGE>
 
   The creative process begins with the development of a story line. From the
established story line, the writer develops a character's actions and
motivations into a plot. After the writer has developed the plot, the pencil
artist translates it into an action-filled pictorial sequence of events. The
penciled story is returned to the writer who adds dialogue, indicating where
the balloons and captions should be placed. The completed dialogue and artwork
are forwarded to a letterer who letters the dialogue and captions in the
balloons. Next, an inker enhances the pencil artist's work in order to make
the drawing appear three-dimensional.
 
   The artwork is then sent to a coloring artist. Typically using only four
colors in varying shades, the coloring artist uses overlays to create over 100
different tones. This artwork is subcontracted to a color separator who
produces separations and sends the finished material to the printer.
Unaffiliated entities produce color separations and print all of Marvel
Publishing's comic books. Marvel Publishing currently uses several color
separators and two printers to produce its comic books.
 
 Customers, Marketing and Distribution
 
   Marvel Publishing's primary target market for its comic books has been
teenagers and young adults in the 13 to 23 year old age group. Established
readership of Marvel Publishing's comic books also extends to readers in their
mid-thirties. There are two primary types of purchasers of Marvel Publishing's
comic books. One is the traditional purchaser who buys comic books like any
other magazine. The other is the reader-saver who purchases comic books,
typically from a comic book specialty store, and maintains them as part of a
collection.
 
   Marvel Publishing's comic book publications are distributed through three
channels: (i) to comic book specialty stores on a nonreturnable basis (the
"direct market"), (ii) to traditional retail outlets on a returnable basis
(the "retail returnable market"), and (iii) on a subscription sales basis.
 
   For the years ended December 31, 1996, 1997 and 1998, approximately 65%,
68% and 81%, respectively, of Marvel Publishing's net publishing revenues were
derived from sales to the direct market. Marvel Publishing distributes its
publications through an unaffiliated entity which, in turn, services specialty
market retailers and direct market comic book shops.
 
   For the years ended December 31, 1996, 1997 and 1998, approximately 19%,
22% and 10%, respectively, of Marvel Publishing's net publishing revenues were
derived from sales to the retail returnable market. The retail returnable
market consists of traditional periodical retailers such as newsstands,
convenience stores, drug stores, supermarkets, mass merchandise and national
bookstore chains. The distributors sell Marvel Publishing's publications to
wholesalers, who in turn sell to the retail outlets. Management issues credit
to these distributors for unsold and returned copies. Distribution to national
bookstore chains is accomplished through a separate distributor.
 
   For the years ended December 31, 1996, 1997 and 1998, approximately 6%, 3%
and 3%, respectively, of Marvel Publishing's net publishing revenues were
derived from subscription sales.
 
   For the years ended December 31, 1996, 1997 and 1998, approximately 10%, 7%
and 6%, respectively, of Marvel Publishing's net publishing revenues were
derived from advertising sales and other publishing activities. In most of
Marvel Publishing's comic publications, ten pages (three glossy cover pages
and seven inside pages) are allocated for advertising. The products advertised
include sports and entertainment trading cards, video games, role playing
games, movies, candy, cereals, toys, models and other consumer packaged goods.
Marvel Publishing permits advertisers to advertise in a broad range of Marvel
Publishing's comic book publications which target specific groups of titles
that have a younger or older readership.
 
                                       5
<PAGE>
 
Toy Biz
 
   Toy Biz designs, develops, markets and distributes both innovative and
traditional toys in the boys', girls', activities/games and electronic toy
categories based on popular entertainment properties, consumer brand names and
proprietary designs. Toy Biz's products are distributed to a number of general
and specialty merchandisers and distributors in the United States and
internationally.
 
   Based on industry reports, the domestic toy market (excluding video games)
generated over $22 billion in retail sales in 1997. The toy industry is a
highly competitive environment in which large mass market toy retailers
dominate the industry and feature a large selection of toys. In recent years,
entertainment conglomerates, through films, television shows and print
products, have emerged as important content providers for toy manufacturers.
In addition, continued consolidation among discount-oriented retailers can be
expected to require toy companies to keep prices low and to implement and
maintain production and inventory control methods permitting them to respond
quickly to changes in demand. In addition to the competitive pressures placed
on manufacturers and distributors, the toy industry is subject to changing
consumer preferences and significant seasonal patterns in sales. Some products
in the toy industry are perennial favorites and others are successfully marketed
only for a limited period of time. While it is impossible to predict future
trends in a business as fad-oriented as the toy industry, the Company believes
that its products are sufficiently diverse, well made and attractively priced to
benefit from those trends.
 
 Products
 
   Toy Biz has historically marketed a variety of toy products designed for
children of different age groups. A substantial portion of Toy Biz's products
are based on the Marvel characters. During the period 1994 to 1998, the
Company had average annual sales of $92.9 million of toys based on the Marvel
characters, such as the Spider-Man Web Blaster, the top-selling action figure
accessory toy during 1997. Toy Biz's current product strategy is to increase
sales of Marvel-based toys, which generate higher margins than the Company's
other toy product lines. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview." In 1998,
approximately 65% of the Company's net toy sales were generated from products
not based on the Marvel characters. Toy Biz produces a portion of its products
under licenses which it has obtained from third parties. In carrying out its
business strategy, Toy Biz continuously monitors existing licensed properties
and pursues new licenses where it believes that the new licenses fit with Toy
Biz's core product lines, or where they may add to Toy Biz's core product mix.
 
   Some of Toy Biz's licenses confer rights to exploit original concepts
developed by toy inventors and designers. Other licenses, referred to as
trademark or brand name licenses, permit Toy Biz to produce toys bearing the
recognized consumer trademark or brand name owned by the licensor. In return
for these rights Toy Biz pays royalties to its licensors. Royalties paid by
Toy Biz to licensors and inventors are typically based on a percentage of net
sales. Most licenses have terms of one to three years and some are renewable
at the option of Toy Biz upon payment of minimum guaranteed payments or the
attainment of certain sales levels during the term of the license. In the
future, royalty rates and minimum guaranteed royalty payments may increase or
decrease depending upon various competitive forces in the toy industry.
 
   Boys' Products. Toy Biz is a leading marketer of youth entertainment
products for domestic and international markets. These products are based on
fictional action adventure characters owned or licensed by the Company. Action
figures based on X-Men, consisting of over 300 characters, have been the most
successfully developed of Toy Biz's action adventure lines. The popularity of
the X-Men primarily resulted from that character group's long-standing success
as a comic book title, as well as the past success of the Fox Kids Television
Network's animated X-Men television show. Management believes that Toy Biz can
continue to take advantage of the popularity of the X-Men and other characters
by introducing new assortments of action figures, play sets and vehicles based
upon new television programming and motion pictures.
 
                                       6

<PAGE>
 
   The Spider-Man product line also capitalizes on an animated television
series which is broadcast on the Fox Kids Television Network. The Spider-Man
toy line includes action figures, vehicles, play sets and accessories such as
the popular Spider-Man Web Blaster. Toy Biz launched Silver Surfer products
based upon the Silver Surfer animated television program which was broadcast
on the Fox Kids Television Network from fall 1997 through spring 1998.
 
   Toy Biz's boys' products business is also comprised of other character
genres supported by television advertising and broadcasts as well as popular
video game characters. Toy Biz continues to market a line of action figures
and play sets based on characters portrayed in the Xena: Warrior Princess
syndicated television program. Toy Biz also markets play sets and vehicles
using well-known stock car drivers and NASCAR licenses. Toy Biz has recently
launched an action figure line based upon Resident Evil, a popular video game
title. In 1998, Toy Biz introduced a popular boys' product, the WCW/NWO
Bashin' Brawlers, under a license from World Championship Wrestling. Toy Biz
also launched an action figure line based upon that license in January 1999.
 
   Girls' Products. Toy Biz's girls' business continues to be well received by
consumers with new introductions and product line extensions. Baby Tumbles
Surprise, Take Care of Me Twins, Casey Cartwheel, Magic Stroller Baby and Come
to Me Baby Crawl 'n Walk were all top-selling dolls in the years when they were
introduced. Toy Biz also continues to market Baby Tumbles Surprise and Baby
Headstand Surprise and has extended another line with the introduction of the
Take Care of Me Triplets dolls. Toy Biz also continues to take advantage of the
name recognition and the goodwill associated with the Gerber name with the
production of its line of dolls. Management believes that Toy Biz will continue
to be an important source of new girls' products for the retail toy market.
 
   Activity Toys. The Company believes that the Spectra Star brand name
accounts for a substantial share of the United States mass market kite
business. Toy Biz also utilizes license-driven products to expand the consumer
appeal of its kite products. Toy Biz's kite licenses have been granted by
well-known licensors such as Disney, Sony Pictures, Nickelodeon, Universal
Studios and Warner Bros. Toy Biz's activity toy products also include model
rocketry products and Toy Biz's proprietary multi-activity game tables.
 
   Games. Toy Biz entered the game market with the introduction of Electronic
Talking Rotten Egg in 1998. Toy Biz will also introduce two new games in 1999,
Electronic Interactive Whac-a-Mole Game, based on the popular arcade game, and
WCW/NWO Electronic Talking Thumb Wrestling Game.
 
 Design and Development
 
   Toy Biz maintains a product development staff and also obtains new product
ideas from third-party inventors. The time from concept to production of a new
toy can range from six to twenty-four months, depending on product complexity.
 
   Toy Biz relies on independent parties in China to manufacture a substantial
portion of its products. The remainder of its products are manufactured in
Mexico or the United States. As a matter of policy, Toy Biz uses several
different manufacturers. By concentrating its manufacturing among certain
manufacturers, Toy Biz pursues a strategy of selecting manufacturers at which
Toy Biz's product volume qualifies Toy Biz as a significant customer. Toy Biz
is not a party to any long-term agreement with any manufacturer. See "--Risk
Factors--We depend on toy manufacturers in China."
 
   Toy Biz's Spectra Star products are manufactured mainly in Mexico by the
Company's Mexican subsidiary. During 1997, Toy Biz completed the construction
of a new manufacturing facility in Mexico in order to expand manufacturing
capacity for the Spectra Star and possibly other product lines.
 
                                       7
<PAGE>
 
     Toy Biz maintains a Hong Kong office from which it regularly monitors the
progress and performance of its manufacturers and subcontractors. Toy Biz also
uses Acts Testing Labs (H.K.) Ltd., a leading independent quality-inspection
firm, to maintain close contact with its manufacturers and subcontractors in
China and to monitor quality control of Toy Biz's products. Toy Biz uses an
affiliate of Acts Testing Labs (H.K.) Ltd. to provide testing services for a
limited amount of product currently produced in the United States.
 
 Customers, Marketing and Distribution
 
   Toy Biz markets and distributes its products in the United States and
internationally, with sales to customers in the United States accounting for
approximately 80%, 78% and 84% of the Company's net toy sales in 1996, 1997
and 1998, respectively.
 
   Outlets for Toy Biz's products in the United States include specialty toy
retailers, mass merchandisers, mail order companies and variety stores, as
well as independent distributors who purchase products directly from Toy Biz
and ship them to retail outlets. Toy Biz's five largest customers include Toys
'R' Us, Inc., Wal-Mart Stores, Inc., Kmart Corporation, Target Stores, Inc., a
division of Dayton-Hudson Corp., and Kay-Bee Toys, a division of Consolidated
Stores, Inc., which customers accounted in the aggregate for approximately
60%, 60% and 66% of the Company's total toy sales in 1996, 1997 and 1998,
respectively. See "--Risk Factors--Our customer base for toys is
concentrated."

   Toy Biz maintains a sales and marketing staff and retains various
independent manufacturers' sales representative organizations in the United
States. Toy Biz's management coordinates and supervises the efforts of its
salesmen and its other sales representatives. Toy Biz also directly introduces
and markets to customers new products and extensions to previously marketed
product lines by participating in the major toy trade shows in New York, Hong
Kong and Europe and through a showroom maintained by Toy Biz in New York.
 
   Toy Biz's products are sold outside the United States through independent
distributors by the Company's Hong Kong subsidiary, under supervision of Toy
Biz's management. Toy Biz's international product line generally includes
products currently or previously offered in the United States, packaged to
meet local regulatory and marketing requirements.
 
   Toy Biz utilizes an independent public warehouse in the Seattle, Washington
area, for storage of its products. Management believes that adequate
alternative storage facilities are available. Disruptions in shipments from
China or from this facility could have a material adverse effect on Toy Biz.
 
Intellectual Property
 
   The Company believes that its library of proprietary characters as well as
its "Marvel" trade name represent its most valuable assets and that its
library could not be easily replicated. The Company currently conducts an
active program of maintaining and protecting its intellectual property rights
in the United States and in approximately 55 foreign countries. The Company's
principal trademarks have been registered in the United States, certain of the
countries in Western Europe and South America, Japan, Israel and South Africa.
While the Company has registered its intellectual property in these countries,
and expects that its rights will be protected in these countries, certain
other countries do not have intellectual property laws that protect
United States holders of intellectual property and there can be no assurance
that the Company's rights will not be violated or its characters "pirated" in
these countries.
 
Advertising
 
   Although a portion of the Company's advertising budget for its toy products
is expended for newspaper advertising, magazine advertising, catalogs and
other promotional materials, the Company allocates a majority of its
advertising budget for its toy products to television promotion. The Company
advertises on national television 
 
                                       8
<PAGE>
 
and purchases advertising spots on a local basis. Management believes that
television programs underlying the Company's toy product lines increase exposure
and awareness.
 
   The Company currently engages Tangible Media, Inc. ("Tangible Media"), an
affiliate of Isaac Perlmutter, to purchase certain of its advertising. Mr.
Perlmutter is a director and a principal stockholder of the Company. The
Company retains the services of a media consulting agency for advice on
matters of advertising creativity.
 
Competition
 
   The industries in which the Company competes are highly competitive.
 
   Marvel Licensing competes with a diverse range of entities which own
intellectual property rights in characters. These include D.C. Comics (which
is owned by Time Warner, Inc.), The Walt Disney Company and other
entertainment-related entities. Many of these competitors have greater
financial and other resources than the Company.
 
   Marvel Publishing competes with over 500 publishers in the United States.
Some of Marvel Publishing's competitors such as D.C. Comics are part of
integrated entertainment companies and may have greater financial and other
resources than the Company. Marvel Publishing also faces competition from
other entertainment media, such as movies and video games, but management
believes that it benefits from the low price of comic books in relation to
those other products.

   Toy Biz competes with many larger toy companies in the design and
development of new toys, the procurement of licenses and for adequate retail
shelf space for its products. The larger toy companies include Hasbro, Inc.,
Mattel Inc., Playmates, Inc. and Bandai, Co., Ltd., and Toy Biz considers Just
Toys, Inc., Empire of Carolina, Inc. and Ohio Art Co. to be among its
competitors as well. Many of these competitors have greater financial and
other resources than the Company. The toy industry's highly competitive
environment continues to place cost pressures on manufacturers and
distributors. Discretionary spending among potential toy consumers is limited
and the toy industry competes for those dollars along with the makers of
computers and video games. Management believes that strong character and
product licenses, the industry reputation and ability of its senior
management, the quality of its products and its overhead and operational
controls have enabled Toy Biz to compete successfully.
 
Employees
 
   As of December 31, 1998, the Company employed approximately 1,650 persons
(including employees of the Fleer/SkyBox and Panini businesses). The Company
also contracts for creative work on an as-needed basis with approximately 250
active freelance writers and artists. The Company's employees are not subject
to any collective bargaining agreements. Management believes that the
Company's relationship with its employees is good.
 
Government Regulations; Insurance
 
   The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those
laws empower the Consumer Product Safety Commission (the "CPSC") to protect
children from hazardous toys and other articles. The CPSC has the authority to
exclude from the market articles which are found to be hazardous. Similar laws
exist in some states and cities in the United States, Canada and Europe. The
Company maintains a quality control program (including the inspection of goods
at factories and the retention of an independent quality-inspection firm)
designed to ensure compliance with applicable laws.
 
   The Company's business exposes it to potential product liability risks
which are inherent in the design, marketing and sale of children's products.
The Company currently maintains product liability insurance and an 
 
                                       9

<PAGE>
 
umbrella liability policy. In the event of a successful claim against the
Company, a lack of sufficient insurance coverage could have a material adverse
effect on Toy Biz's business and operations. Moreover, though the Company
maintains what it considers to be adequate insurance, a claim could materially
and adversely affect the reputation and prospects of the Company.
 
The Reorganization
 
   On December 27, 1996, MEG and certain of its subsidiaries filed voluntary
petitions for relief under chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware (collectively,
the "Bankruptcy Case"). The Fourth Amended Plan of Reorganization (the "Plan")
proposed by Toy Biz, Inc. and certain secured creditors of MEG in the
Bankruptcy Case was confirmed by the United States District Court for the
District of Delaware (the "District Court"), which had assumed jurisdiction
over the Bankruptcy Case, and in connection with that confirmation, all
appeals relating to consummation of the Plan were withdrawn by all parties
involved in the Bankruptcy Case.
 
   The Merger, the Charter Amendment, the Equity Securities Issuances, the
Secured Creditors Cash Payment, the Unsecured Creditors Cash Payment, the
Initial Administration Expense Claims Payment, the Panini Payment, the Panini
Guaranty, the Dispute Settlement and Professional Fees Payments, the Capital
Contribution, the Refinancing, the Bridge Loan, the Standstill Agreements and
the Litigation Trusts, in each case as described below, are referred to in this
Report collectively as the "Reorganization."
 
   Pursuant to the Plan, the Company used the proceeds from the Bridge Loan,
together with other funds, to consummate the following transactions on October
1, 1998, the date of the Plan's consummation:

 Merger
 
   Pursuant to an Agreement and Plan of Merger, dated as of August 12, 1998,
by and among MEG, MEG Acquisition Corp., a Delaware corporation and a wholly-
owned subsidiary of Toy Biz, Inc., and Toy Biz, Inc., MEG Acquisition Corp.
merged with and into MEG, with MEG surviving as a wholly-owned subsidiary of
Toy Biz, Inc.
 
 Charter Amendment
 
   Toy Biz, Inc. amended (the "Charter Amendment") its restated certificate of
incorporation and by-laws to, among other things: (i) change its name from
"Toy Biz, Inc." to "Marvel Enterprises, Inc."; (ii) authorize that the Company
shall have only one class of authorized common stock, par value $.01 per share
(the "Common Stock"), with 250 million shares authorized, each share of which
will have one vote; (iii) authorize 100 million shares of preferred stock, par
value $.01 per share (the "Preferred Stock"), and designate 75 million shares
of the Preferred Stock as 8% cumulative convertible exchangeable preferred
stock, par value $.01 per share (the "8% Preferred Stock"); and (iv) provide
that the board of directors of the Company (the "Board") consist of eleven
directors.
 
 Equity Securities Issuances
 
   In connection with the consummation of the Plan, the Company issued
(collectively, the "Equity Securities Issuances"):
 
     (1) 16.9 million shares of 8% Preferred Stock as follows: (a) 7.9
  million shares to certain secured creditors of MEG (the "Secured
  Creditors") and (b) 9 million shares to certain purchasers (the 
  "Preferred Stock Investors");
 
     (2) 13.1 million shares of Common Stock to the Secured Creditors;
 
                                      10
<PAGE>
 
     (3) warrants to purchase up to 1.75 million shares of Common Stock at an
  exercise price of $17.25 per share (the "Plan Warrants") to certain
  unsecured creditors of MEG (the "Unsecured Creditors"); and
 
     (4) the following warrants to former stockholders of MEG and holders of
  certain class securities litigation claims concerning MEG stock
  (collectively, the "MEG Equity Holders"), the Unsecured Creditors and
  certain other creditors of MEG: (a) three-year warrants to purchase 4
  million shares of Common Stock at an exercise price of $12.00 per share
  (the "Stockholder Series A Warrants"); (b) six-month warrants to purchase 3
  million shares of 8% Preferred Stock at an exercise price of between $10.65
  and $11.88, based on the date of warrant issuance, per share (the
  "Stockholder Series B Warrants"); and (c) four-year warrants to purchase 7
  million shares of Common Stock at an exercise price of $18.50 per share
  (the "Stockholder Series C Warrants," and together with the Stockholder
  Series A Warrants and the Stockholder Series B Warrants, the "Stockholder
  Warrants"; the Stockholder Warrants and the Plan Warrants, collectively,
  the "Warrants"). The completion of all distributions to the Unsecured
  Creditors is pending until the District Court makes certain determinations
  concerning the amount of the Unsecured Creditors' allowed claims.
 
 Secured Creditors Cash Payment
 
   The Company paid $221.8 million in cash (the "Secured Creditors Cash
Payment") to the Secured Creditors. An additional $10 million had been paid to
the Secured Creditors in the second quarter of 1998 in connection with the sale
of MEG's confectionery business.
 
 Unsecured Creditors Cash Payment
 
   The Company deposited money into a trust account that will be used to make
a cash payment to the Unsecured Creditors in an amount equal to the lesser of
(i) $2 million plus fifteen percent (15%) of the amount of their allowed
claims and (ii) $8 million (the "Unsecured Creditors Cash Payment"). The
Company currently anticipates that the Unsecured Creditors Cash Payment will
equal $8 million.

 Initial Administration Expense Claims Payment
 
   The Company agreed to pay in cash all administration expense claims
incurred in connection with the Bankruptcy Case (the "Administration Expense
Claims"). On the consummation date of the Plan, the Company paid approximately
$20.2 million of Administration Expense Claims (the "Initial Administration
Expense Claims Payment"). In December 1998, the Company paid approximately
$4.2 million of additional Administration Expense Claims. The Company
estimates that it may be required to pay between $10 million and $20 million
of additional Administrative Expense Claims, although there can be no
assurance as to the amount the Company will be required to pay. If the
aggregate amount of Administration Expense Claims is in excess of $35 million,
Zib Inc. ("Zib"), an affiliate of Mr. Perlmutter, has agreed that Zib or one
of its affiliates will lend the Company the amount of the excess in exchange
for a five-year promissory note from the Company (the "Excess Administration
Expense Claims Note") which would bear interest at 2% above the interest rate
on the Notes.
 
 Panini Payment and Panini Guaranty
 
   The Company paid $13 million in cash (the "Panini Payment") to certain
creditors (the "Panini Creditors") of Panini SpA and issued to the Panini
Creditors a deficiency guaranty (the "Panini Guaranty") of up to $27 million
of Panini SpA's indebtedness. The Company has the right to terminate the
Panini Guaranty at any time by delivering to holders of the restructured
Panini SpA debt a standby letter of credit or debt securities of the Company
having a value equal to the amount of the Panini Guaranty. The terms of the
Panini Guaranty provide that the Company cannot sell any of its significant
subsidiaries or change the principal nature of its business. The Company has
also agreed to indemnify the Panini Creditors against any expenses incurred by
them in enforcing the Panini Guaranty against the Company. The subsidiary
guarantors with respect to the Notes are also guarantors under the Panini
Guaranty.
 
                                      11
<PAGE>
 
 Dispute Settlement and Professional Fees Payments
 
   The Company paid $3.5 million in cash (the "Dispute Settlement Payment") to
certain claimants in the Bankruptcy Case in settlement of disputes. The
Company also paid $200,000 (the "Professional Fees Payment") to Dickstein
Partners Inc. in reimbursement of professional fees incurred in connection
with the purchase of shares of 8% Preferred Stock on October 1, 1998.
Dickstein Partners Inc. is an affiliate of Mark Dickstein, who became a
director of the Company after October 1, 1998.
 
 Capital Contribution
 
   The Company received a capital contribution totaling $1.5 million (the
"Capital Contribution") from an affiliate of Mr. Perlmutter and from Avi Arad.
Mr. Arad is a director, executive officer, and principal stockholder of the
Company.
 
 Refinancing
 
   The Company repaid all outstanding indebtedness (the "Refinancing") under
Toy Biz, Inc.'s then-existing working capital facility.
 
 Bridge Loan
 
   The Company obtained the Bridge Loan from UBS. A portion of the proceeds
from the Notes Offering were used to repay the Bridge Loan.
 
 Standstill Agreements
 
   Carl C. Icahn and High River Limited Partnership (the "High River Group")
and Vincent Intrieri and Westgate International L.P. (the "Westgate Group")
entered into standstill agreements (the "Standstill Agreements") on the
consummation date of the Plan. Pursuant to the Standstill Agreements, the High
River Group and the Westgate Group have each agreed that they will not, and will
not permit their affiliates or associates to, among other things, seek to
control the management of the Company. In addition, the Standstill Agreements
require that the High River Group and Westgate Group vote all securities
beneficially owned by them in connection with any action to be taken by the
Company's securityholders with respect to which an abstention will have the same
effect as a vote against the matter, in proportion to the votes cast with
respect to that action by all other holders of securities. With respect to all
other matters to be voted upon at a meeting of the Company's securityholders,
the High River Group and Westgate Group shall cause securities beneficially
owned by them to be present at the meeting for quorum purposes but to abstain
from voting on the matter. The Standstill Agreements will terminate on October
1, 2002, subject to earlier termination under certain circumstances.
 
 Litigation Trusts
 
   In accordance with the Plan, two litigation trusts were formed on the
consummation date of the Plan. Each litigation trust is now the legal owner of
litigation claims that formerly belonged to MEG and its subsidiaries. The
primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to
pursue bankruptcy avoidance claims. The primary purpose of the other trust
(the "MAFCO Litigation Trust") is to pursue certain litigation claims against
Ronald O. Perelman and various related entities and individuals. The Company
has agreed to lend up to $1.1 million to the Avoidance Litigation Trust and up
to $1 million to the MAFCO Litigation Trust, in each case on a revolving
basis to fund the trust's professional fees and expenses. Each litigation
trust is obligated to reimburse the Company for all sums advanced, with simple
interest at the rate of 10% per year. Net litigation proceeds of each trust
will be distributed to the trust's beneficiaries only after the trust has,
among other things, paid all sums owed to the Company, released the Company
from any further obligation to make loans to the trust, and established
reserves to 
 
                                      12
<PAGE>
 
satisfy indemnification claims. The Company is entitled to 65.1%
of net litigation proceeds from the Avoidance Litigation Trust. The Company is
not entitled to any net litigation proceeds from the MAFCO Litigation Trust.
 
Sources and Uses of Funds to Consummate the Reorganization
 
   The following table sets forth the sources and uses of funds in connection
with the Reorganization:
 
<TABLE>
<CAPTION>
                                                                   (in millions)
                                                                   -------------
<S>                                                                <C>
Sources of Funds (1):
Cash..............................................................    $ 29.8
Bridge Loan.......................................................     200.0
8% Preferred Stock................................................      90.0
Capital Contribution..............................................       1.5
                                                                      ------
   Total Sources of Funds.........................................    $321.3
                                                                      ======
Uses of Funds (1):
Secured Creditors Cash Payment....................................    $221.8
Unsecured Creditors Cash Payment..................................       8.0
Initial Administration Expense Claims Payment.....................      20.2
Panini Payment....................................................      13.0
Dispute Settlement and Professional Fees Payments.................       3.7
Refinancing.......................................................      21.0
Fees and expenses.................................................       6.8
Working capital...................................................      26.8
                                                                      ------
   Total Uses of Funds............................................    $321.3
                                                                      ======
</TABLE>
--------
(1) Excludes the issuance of (1) 7.9 million shares of 8% Preferred Stock to
    the Secured Creditors; (2) 13.1 million shares of Common Stock to the
    Secured Creditors; (3) the Plan Warrants to the Unsecured Creditors;

   and (4) the Stockholder Warrants to the MEG Equity Holders, the Unsecured
   Creditors and certain other creditors of MEG. See "--The Reorganization 
   --Equity Securities Issuances."
 
Risk Factors
 
 Our substantial indebtedness could harm us.
 
   Our substantial indebtedness could cause various problems for us, as
detailed below. Our indebtedness consists of the $250 million of Notes that we
issued in February 1999 and a guarantee of $27 million of the indebtedness of
Panini SpA. In addition, we expect to be able to borrow at least $60 million
under a new working capital facility.
 
   The amount of our indebtedness could have important consequences to our
noteholders and stockholders, including, but not limited to, the following:
 
   .  our ability to borrow money or sell stock for working capital, capital
      expenditures, acquisitions, general corporate or other purposes may be
      limited;
 
   .  a substantial portion of whatever cash we make from our business will be
      needed to pay the principal of, and interest on, our indebtedness,
      thereby reducing the funds available to operate our business;

   .  our ability to develop our business and expand may be limited by the
      indenture governing the Notes or by our other loan agreements; and
     
                                      13
<PAGE>
 
  .  our indebtedness may make us more vulnerable to economic downturns,
     limit our ability to withstand competitive pressures and reduce our
     flexibility in responding to changing business and economic conditions.
 
   Our ability to pay dividends on the 8% Preferred Stock, to pay interest on
the Notes, to repay our future lenders and to operate and grow our business
will depend on our operating success, which could be affected by many factors,
including general economic conditions and other factors beyond our control. If
we do not fulfill the promises that we made in the indenture governing the
Notes, or the promises that we make in other loan agreements, the noteholders
or our other lenders could demand that we pay back all the money we owe them
under those agreements immediately. It is possible that the cash we generate
by operating our business, together with borrowings expected to be available
under a new working capital facility, if obtained, will be too little to make
required payments under the indenture and other loan agreements and to cover
our other cash requirements. In that case, we would need to renegotiate those
agreements, to refinance our indebtedness or to obtain additional financing;
but we might be unable to do so.
 
 We may need additional financing but be unable to obtain it.
 
   We may need a new working capital facility but be unable to obtain it. Even
if we obtain a new working capital facility, its terms will probably require
us to comply with various financial and other covenants in order to borrow
money. We failed to comply with similar covenants under the revolving credit
facility that we obtained on October 1, 1998 (which we terminated in February
1999). If we do not obtain a satisfactory new working capital facility, or if
we are otherwise unable to obtain any additional funds, it could significantly
harm us.
 
 Our financing agreements limit our operating flexibility.
 
   Both the indenture that governs the Notes and a new working capital
facility, if obtained, will constrict us in ways that may limit our financial
success. For instance, they will limit our ability to:
 
  .  incur additional indebtedness;
 
  .  incur liens;
 
  .  pay dividends, make investments or make some types of payments;

  .  consummate some types of asset sales;
 
  .  enter into some types of transactions with affiliates;
 
  .  merge or consolidate with any other person; or
 
  .  sell, assign, transfer, lease, convey or otherwise dispose of all or
     substantially all of our assets.
 
   If we obtain a new working capital facility, it will probably require us to
satisfy various financial tests. Events beyond our control might cause us to
fail those tests. If we fail any of the tests, our new working capital
facility lenders will have the right to demand that we pay back all the money
we owe them at once. If we are unable to repay the money, those lenders might
be entitled to sell substantially all our assets, which we expect will be
pledged to the lenders to secure our debt.
 
 The financial data of MEG has limited use in evaluating our future
 performance.
 
   The financial data of MEG is not indicative of our future performance due
to several factors, including: (1) the effects of MEG's acquisition of Panini
SpA on September 1, 1994; (2) MEG's consolidation of its financial  

                                      14
<PAGE>
 
statements with those of Toy Biz, Inc. from March 2, 1995 (the date of Toy Biz,
Inc.'s initial public offering) through June 30, 1997 (the results of operations
of Toy Biz, Inc. after June 30, 1997 are not included in MEG's statement of
operations data); (3) the effects of MEG's acquisition of SkyBox International
Inc. on April 27, 1995; (4) MEG's commencement of bankruptcy proceedings on
December 27, 1996; (5) the Reorganization; (6) the Fleer Sale and (7) the
intended disposition of the Panini business. As a result, there is limited
financial and operating data of MEG for a potential investor to evaluate.
 
 We might not be able to integrate the businesses of Toy Biz, Inc. and MEG.
 
   Our future success will depend in part on our ability to effectively
integrate the businesses of Toy Biz, Inc. and MEG. This process may require a
disproportionate amount of time and attention of our management, financial and
other resources. Although we believe that we have the opportunity for
synergies and cost savings, the timing or amount of synergies or cost savings
that may ultimately be attained is uncertain. Some of the anticipated benefits
of the combination may not be achieved if our operations are not successfully
integrated in a timely manner. The difficulties of that integration may
initially be increased by the necessity of coordinating and integrating
personnel with different business backgrounds and corporate cultures. We might
not be able to integrate effectively Toy Biz, Inc.'s and MEG's operations. If
we are not successful in this combination, if the combination takes longer
than anticipated, or if the integrated operations fail to achieve market
acceptance, our business could be adversely affected. In addition,
implementation of our business strategy will be subject to numerous other
contingencies beyond our control, including, among others, general and
regional economic conditions, interest rates, competition, and the ability to
attract and maintain skilled employees. As a result, the combination might not
be successful, our business strategies might not be effective and we might not
be able to achieve our goals.
 
 There have been declines in many of our lines of business in recent periods.
 
   In recent years there has been a decline in many of our businesses, and
that decline may continue. In 1995 and 1996, there was an overall decline in
MEG's core publishing business, its licensing business and its sports and
entertainment trading card business which had a material adverse effect on
MEG. This decline, along with the substantial indebtedness incurred by MEG in
connection with its acquisition program, ultimately led MEG to file for
bankruptcy protection in 1996. MEG's publishing revenues, along with those of
the overall comic book industry, declined primarily as a result of reduced
readership, lower speculative purchases and lower selling prices, which in
turn caused a contraction in the number of comic book specialty stores. These
store closings further hurt MEG's net publishing revenues. In 1997 and 1998,
MEG's publishing revenues continued to decline due to these reasons and MEG's
decision to eliminate unprofitable comic book titles. We do not expect
publishing revenues to return to pre-bankruptcy levels.
 
   MEG's licensing revenues declined significantly from pre-bankruptcy levels.
These revenues decreased from $54.7 million in 1995 to $15.1 million in 1998.
There can be no assurance that our licensing revenues will reach MEG's pre-
bankruptcy levels.

 
   The bankruptcy of MEG also caused a decline in our toy business because a
substantial portion of our toy products were based on characters licensed to
us by MEG. Our toy business might not return to its pre-bankruptcy levels. In
addition, during the fourth quarter of 1998, our operations were hurt by the
decision of Toys 'R' Us, one of our major customers, to significantly reduce
its toy inventory levels.
 
   Our net toy sales were $221.6 million, $150.8 million and $212.4 million in
1996, 1997 and 1998, respectively, while our toy operating income (loss) was
$27.2 million, $(49.3) million and $(18.7) million, respectively, for such
periods. MEG's revenues (including the Fleer/SkyBox sports and entertainment
trading card and Panini activity sticker and adhesive paper businesses) were
$745.5 million, $471.7 million and $273.5 million in 1996, 1997 and the nine
months ended September 30, 1998, respectively, while its operating loss was
$(386.3) million, $(191.4) million and $(2.3) million, respectively, for such
periods.
 
                                      15
<PAGE>
 
   We believe the sales and the profitability of each of our businesses have
been hurt by concerns about the effect of MEG's bankruptcy proceedings among
customers and others with whom we do business. While we believe that the
consummation of MEG's plan of reorganization has alleviated these concerns,
our sales and profitability might continue to be adversely affected.
 
 Our customer base for toys is concentrated.
 
   Like other toy makers, we are dependent upon toy retailers and mass
merchandisers to distribute our products. The retail toy business is highly
concentrated. The five largest customers for our toy products accounted in the
aggregate for approximately 66% of our total toy sales in 1998. An adverse
change in, or termination of, our relationship with one or more of our major
customers could have a material adverse effect on us. In recent years, the
retail chain store industry, and the toy retail industry in particular, have
undergone significant consolidation. To the extent that this consolidation
continues, our distribution base could shrink, thereby concentrating an even
greater percentage of our sales in a smaller number of retailers and
increasing the remaining toy retailers' ability to negotiate more favorable
terms and prices from us.
 
 Toy retailers' inventory management systems could cause us to produce the
 wrong amount of toy products.
 
   Each of our five top toy customers uses, to some extent, inventory
management systems which track sales of particular products and rely on
reorders being rapidly filled by suppliers like us, rather than on large
inventories being maintained by the retailers themselves. These systems
increase pressure on us to fill orders promptly. The systems also shift a
portion of retailers' inventory risk onto us. Our production of excess
products to meet anticipated retailer demand could result in markdowns and
increased inventory carrying costs for us on even our most popular items. For
instance, we believe that our operations were negatively impacted in the
fourth quarter of 1998 by the decision of Toys 'R' Us, one of our major
customers, to significantly reduce its toy inventory levels. If we fail to
anticipate a high demand for our products, however, we face the risk that we
may be unable to provide adequate supplies of popular toys to retailers in a
timely fashion, particularly during the Christmas season, and may consequently
lose sales.
 
 We are vulnerable to changing consumer preferences.
 
   Our new and existing toy products are subject to changing consumer
preferences. Most of our toy products can be successfully marketed for only a
limited period. In particular, toys based on feature films are in general
successfully marketed for only a year or two following the film's release.
Existing product lines might not retain their current popularity or new
products developed by us might not meet with the same success as our current
products. We might not accurately anticipate future trends or be able to
successfully develop, produce and market products to take advantage of market
opportunities presented by those trends. Part of our strategy is to make toys
based on the anticipated success of feature film releases and TV show
broadcasts. If these releases and broadcasts are not successful, we may not be
able to sell these toys profitably, if at all. In addition, we derive a
substantial portion of our revenues from a limited number of popular toys. In
particular, we expect products based on our World Championship Wrestling
license to generate a significant portion of our operating income during the
next several years. If these products are not successful, it could have a
material adverse effect on us.
 
 We depend on toy manufacturers in China.
 
   A large number of our toy products are manufactured in China, which
subjects us to risks of currency exchange fluctuations, transportation delays
and interruptions, and political and economic disruptions. Our ability to
obtain products from our Chinese manufacturers is dependent upon the United
States' trade relationship with China. The "most favored nation" status of
China, which is reviewed annually by the United States government, is a
regular topic of political controversy. The loss of China's "most favored
nation" status would increase the cost of importing products from China
significantly, which could have a material adverse effect on us. The
imposition of further trade sanctions on China could result in significant
supply disruptions or higher merchandise costs to us. We might not  

                                      16
<PAGE>
 
be able to find alternate sources of manufacturing outside China on acceptable
terms even if we want or need to. Our inability to find those alternate sources
could have a material adverse effect on us.
 
   We purchase goods from manufacturers in China mostly in Hong Kong dollars
and, accordingly, fluctuations in Hong Kong monetary rates may have an impact
on our cost of goods. In recent years, the value of the Hong Kong dollar has
been tied to the value of the United States dollar, eliminating fluctuations
between the two currencies. The Hong Kong dollar, however, might not continue
to be tied to the United States dollar. Furthermore, appreciation of Chinese
currency values relative to the Hong Kong dollar could increase our cost of
products manufactured in China and harm our business.
 
 Our toy business is seasonal.
 
   Unlike many industries, the toy industry tends to be seasonal. Our annual
operating performance depends, in large part, on our sales of toys during the
relatively brief Christmas selling season. During 1996, 1997 and 1998, 64%,
67% and 60%, respectively, of our domestic net toy sales were realized during
the second half of the year. We expect that our toy business will continue to
experience a significant seasonal pattern for the foreseeable future. This
seasonal pattern requires significant use of working capital mainly to build
inventory during the year, prior to the Christmas selling season, and requires
accurate forecasting of demand for our products during the Christmas selling
season. We are seeking to obtain a new working capital facility; however, that
facility is not yet in place, and we might not obtain it. The failure to
obtain a working capital facility could have a material adverse effect on our
business. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
 
 We depend on a single direct market comic book distributor.
 
   We distribute our comic book publications to the direct market through the
only major comic book distributor. The direct market accounted for
approximately 81% of Marvel Publishing's net publishing revenues in 1998. As a
result, a termination of our agreement with that distributor could
significantly disrupt our publishing operations. Our agreement with the
distributor is for a term of three-and-a-half years and automatically renews
for succeeding one-year periods unless terminated by either party. Either
party also has the right to terminate upon the happening of certain events. We
believe that the termination of the current distribution agreement would not
have a long-term material adverse effect on us.
 
 The outcome of stockholder votes is controlled by a small number of
 stockholders.
 
   A majority of the voting power of our stock is held by a small number of
stockholders, who can determine the outcome of most stockholder votes. In
addition, holders of over 60% in voting power of our stock have entered into a
stockholders' agreement with us. The stockholders' agreement provides, among
other things, that its parties shall nominate and vote in favor of each
other's designated members of our board of directors. Other stockholders,
therefore, have little or no ability to select our directors while the
stockholders' agreement is in effect.
 
 We have not yet achieved Year 2000 compliance.
 
   Through December 31, 1998, we incurred Year 2000 conversion costs for our
Toy Biz division of approximately $1.3 million and we expect to incur an
additional $1 million in 1999. We are utilizing both internal and external
sources to remediate, or replace, and test Toy Biz's software for Year 2000
modifications. We anticipate completing the Year 2000 project for Toy Biz by
June 30, 1999.

   We are in the process of completing an assessment of Year 2000 compliance
for the Marvel Licensing and Marvel Publishing operations. MEG did not
allocate resources to the Year 2000 project while it was in bankruptcy, and as
of December 31, 1998, we had incurred no Year 2000 conversion costs for Marvel
Licensing or Marvel Publishing. We believe that we can successfully complete
the Year 2000 compliance of Marvel Licensing and  

                                      17
<PAGE>
 
Marvel Publishing by converting their financial system into the Toy Biz
financial system. We expect to complete the conversion by August 1999. We will
also make other systems used by Marvel Licensing and Marvel Publishing Year 2000
compliant by converting them to the Toy Biz system. We estimate that the costs
to conform Marvel Licensing and Marvel Publishing will be approximately
$500,000.
 
   The cost of the project and the date on which we believe that we will
complete the Year 2000 modifications are only estimates. We currently believe
that the Year 2000 issue will not pose significant operational problems for
our computer systems. We have begun to communicate with our customers and
major suppliers in order to determine whether the Year 2000 issue will affect
the ability of those companies' computer systems to interface with our systems
or will otherwise affect the ability of those companies to transact business
with us. We are not aware of any such material issues with our customers and
suppliers at this time. Our worst-case scenarios would be manual performance
of all accounting functions and the loss of relationships with our major
customers because of the inability of our computers to interface with theirs.
We have not developed a contingency plan to assess the likelihood of, and to
address, our worst-case scenarios. We assess our Year 2000 status regularly
and will begin to develop comprehensive contingency plans if we believe that
we will not complete the Year 2000 project in a timely manner. If our Year
2000 project is not completed on a timely basis, or if our major customers or
suppliers fail to address all the Year 2000 issues, we believe that it could
have a material adverse impact on our operations.
 
ITEM 2. PROPERTIES
 
   The Company has the following principal properties:
 
<TABLE>
<CAPTION>
Facility                       Location                 Square Feet Owned/Leased
--------                       --------                 ----------- ------------
<S>                            <C>                      <C>         <C>
Office........................ New York, New York          69,000      Leased
Office........................ New York, New York          37,000      Leased
Office........................ New York, New York          15,000      Leased
Office/Showroom............... New York, New York           5,200      Leased
Office/Warehouse.............. Yuma, Arizona               80,000       Owned
Warehouse..................... Puyallup, Washington       210,000      Leased
Manufacturing................. San Luis, Mexico           190,000       Owned
Office........................ Santa Monica, California     2,800      Leased
</TABLE>
 
ITEM 3. LEGAL PROCEEDINGS
 
   The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and
claims incident to the normal conduct of its business. Although it is
impossible to predict the outcome of any outstanding legal proceeding and
there can be no assurances, the Company believes that its legal proceedings
and claims (including those described below), individually and in the
aggregate, are not likely to have a material adverse effect on its financial
condition, results of operations or cash flows.
 
   Certain Bankruptcy Proceedings. As a result of the consummation of the Plan
on October 1, 1998, all claims against MEG with respect to orders issued by
the District Court in connection with the Plan have been released, as have all
claims by MEG against the Company and all claims against the Company
concerning the effect of the June 1997 change of control of MEG on the voting
power of the stock in the Company owned by MEG.
 
   Spider-Man Litigation. The Company's subsidiaries Marvel Entertainment
Group, Inc. and Marvel Characters, Inc. (collectively, the "Marvel Parties")
have been parties to a consolidated case, concerning rights to produce and/or
distribute a live action motion picture based on the Spider-Man character and
pending in the Superior Court of the State of California for the County of Los
Angeles, to which Metro-Goldwyn Mayer Studios Inc. and two of its affiliates
("MGM"), Columbia Tristar Home Video and related entities ("Sony"), Viacom
International Inc.  
                   
                                      18

<PAGE>
 
("Viacom") and others were also parties. In February 1999, the Superior Court
granted summary judgment to the Marvel Parties and dismissed MGM's claims. In
March 1999, MGM, Sony and the Marvel Parties settled all remaining claims among
themselves. The litigation among Sony, the Marvel Parties and Viacom over claims
by Viacom to the rights to distribute on pay and free television a feature
length live action motion picture based on the Spider-Man character have not
been resolved. It is the Company's position that Viacom has no such rights. The
rights asserted by Viacom are alleged to arise under an agreement between the
Marvel Parties and 21st Century Productions, Inc., which the Marvel Parties
claim has expired or was terminated, and an agreement between 21st Century and
Viacom to which Marvel was not a party. A trial is currently scheduled to begin
in April, 1999. Although there can be no assurances, the Company believes that
it will ultimately be successful in establishing its television distribution
rights with respect to a Spider-Man movie and intends to litigate its claims
against Viacom vigorously.
 
   Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A.
Wolfman commenced an action in the United States District Court for the
Central District of California against New Line Cinema Corporation, Time
Warner Companies, Inc., the Company, MEG and its wholly-owned subsidiary,
Marvel Characters, Inc., and others. The complaint alleges that the motion
picture Blade, produced and distributed by New Line pursuant to an agreement
with MEG, as well as the Company's sale of action figure toys, infringes
Wolfman's claimed copyrights and trademarks as the author of the original
stories featuring the Blade and Deacon Frost characters (collectively, the
"Work") and that Wolfman created the Work as an independent contractor engaged
by MEG. The relief sought by the complaint includes a declaration that the
defendants have infringed Wolfman's copyrights, compensatory and punitive
damages, an injunction and various other forms of equitable relief. The Company
believes that each component of the Work was created for MEG as a "work for
hire" within the meaning of the applicable copyright statute and believes that
all of Wolfman's claims are without merit and intends to defend the action
vigorously if the action is allowed to proceed.
 
   Prior to commencing his action in California, on January 24, 1997, Wolfman
had filed a proof of claim in the bankruptcy cases of MEG and Marvel
Characters, Inc. asserting ownership rights to the Blade and Deacon Frost
characters, among others. On February 24, 1999, Wolfman and the Company entered 
into a stipulation pursuant to which the United States District Court for the
District of Delaware will determine the issue of whether Wolfman or Marvel
Characters, Inc. (which is now a wholly-owned subsidiary of the Company) is the
rightful owner of Blade and Deacon Frost and a number of other characters. In
the context of this proceeding, the Company has sought a declaration that Marvel
Characters, Inc., not Wolfman, is the lawful owner of the rights claimed by
Wolfman.
 
   Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. While the amounts claimed are material
to the Company's financial position, the Company believes that the ultimate
resolution of these matters will not be material to the Company's financial
condition, results of operations or cash flows, although there can be no
assurance.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
   In the fourth quarter of 1998, the only matter submitted to a vote of the
Company's stockholders was the approval of the Company's 1998 Stock Incentive
Plan (the "Stock Incentive Plan"), which was obtained on December 30, 1998 by
written consent of the Company's stockholders. The Company received written
consents approving the Stock Incentive Plan from holders of record at the
close of business on December 11, 1998 of 64.7% in combined voting power of
the Company's outstanding Common Stock and 8% Preferred Stock. In connection
with the stockholders' approval of the Stock Incentive Plan, an information
statement was filed on December 30, 1998 with the Securities and Exchange
Commission and distributed on that day to stockholders of record at the close
of business on December 11, 1998.
 
                                      19
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
   The following table sets forth, for each fiscal quarter indicated, the high
and low prices for the Company's Common Stock as reported in the New York
Stock Exchange Composite Transaction Tape.
 
<TABLE>
<CAPTION>
      Fiscal Year                                           High       Low
      -----------                                           -----      ----
      <S>                                                   <C>        <C>
      1997
        First Quarter...................................... $  20      $ 8 3/8
        Second Quarter..................................... $  11      $ 8 1/4
        Third Quarter...................................... $  11      $ 7 15/16
        Fourth Quarter..................................... $  9 11/16 $ 7 9/16
      1998
        First Quarter...................................... $ 10 7/16  $ 6 15/16
        Second Quarter..................................... $ 11 5/16  $ 8 15/16
        Third Quarter...................................... $ 10 7/16  $ 6 3/8
        Fourth Quarter..................................... $  6 7/8   $ 4 5/16
</TABLE>
 
   As of March 23, 1999, there were 157 holders of record of the Company's
Common Stock.
 
   The Company has not declared any dividends on the Common Stock. The Company
expects that a new working capital facility, if obtained, will restrict the
Company's ability to pay dividends on the Common Stock. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
 
   During 1998, the Company made the following sales of equity securities which
were not registered under the Securities Act:
 
  1. Pursuant to the Plan, the Company sold 9 million shares of 8% Preferred
     Stock on October 1, 1998 for an aggregate of $90 million to purchasers
     in a private sale. See "Item 11. Executive Compensation--Compensation
     Committee Interlocks and Insider Participation--Agreements Relating to
     the Purchase of Preferred Shares." Exemption from the registration
     requirements of the Securities Act was claimed under Section 4(2) of the
     Securities Act. Each share of 8% Preferred Stock is convertible into
     1.039 shares of Common Stock.
 
  2. In addition, pursuant to the Plan, the Company issued the following
     securities (the "Section 1145 Securities") on October 1, 1998:
 
    (a) 7.9 million shares of 8% Preferred Stock to the Secured Creditors;
 
    (b) 13.1 million shares of Common Stock to the Secured Creditors;
 
    (c) the Plan Warrants to the Unsecured Creditors; and
 
    (d) the Stockholder Warrants to the MEG Equity Holders, the Unsecured
       Creditors and certain other creditors of MEG.
 
                                      20
<PAGE>
 
  See "Item 1. Business--The Reorganization--Equity Securities Issuances." The
  consideration for the Section 1145 Securities is set forth in the Plan, and
  consisted principally of the recipients' claims against MEG or interests in
  MEG. Exemption from the registration requirements of the Securities Act for
  the Section 1145 Securities was claimed under Section 1145 of the United
  States Bankruptcy Code. The completion of all distributions to the Unsecured
  Creditors is pending until the District Court makes certain determinations
  concerning the amount of the Unsecured Creditors' allowed claims.

ITEM 6. SELECTED FINANCIAL DATA
 
   The following table presents selected combined or consolidated financial
data, derived from the Company's audited financial statements, for the
business of the Company for the five-year period ended December 31, 1998. The
selected financial data of the Company for the year ended December 31, 1998
are not comparable to prior periods due to the Company's acquisition of MEG on
October 1, 1998. The Company has not paid dividends on its capital stock
during any of the periods presented below.
 
<TABLE>
<CAPTION>
                                                 Year Ended
                               -----------------------------------------------
                               Dec. 31, Dec. 31, Dec. 31, Dec. 31,   Dec. 31,
                                 1994     1995     1996     1997       1998
                               -------- -------- -------- ---------  ---------
                                  (in thousands, except per share amounts)
<S>                            <C>      <C>      <C>      <C>        <C>
Statement of Operations Data:
Net sales....................  $156,525 $196,395 $221,624 $ 150,812  $ 232,076
Operating income (loss)......    32,072   47,014   27,215   (49,288)   (19,460)
Net income (loss)............    18,014   28,402   16,687   (29,465)   (32,610)
Basic and diluted net income
 (loss) per common share
 (1).........................      0.67     1.05     0.61     (1.06)     (1.23)
Preferred dividend
 requirement.................       --       --       105        71      3,380
At December 31:
Balance Sheet Data:
Working capital (deficit)(2).    39,839   85,174  102,192    74,047   (133,392)
Total assets.................   104,723  152,218  171,732   150,906    689,904
Borrowings...................    21,500      --       --     12,000    200,000
Other non-current debt.......       --       --       --        --      27,000
Due to stockholders and
 affiliated companies........    16,845      --       --        --         --
Redeemable preferred stock...       --     3,016    1,681       --     172,380
Stockholders' equity.........    38,416  111,332  137,455   107,981    183,624
</TABLE>
--------
(1) Assumes 27,000,000 common and common equivalent shares outstanding for
    periods prior to 1995.
(2) At December 31, 1998, the Company had a working capital deficiency of $133.4
    million, due to the required repayment of the Bridge Loan. Giving effect to
    the Notes Offering and the Fleer Sale, the Company would have had working
    capital of $102.3 million.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
   The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Item 7. Management's Discussion and Analysis of Financial Condition 
 
                                      21
<PAGE>
 
and Results of Operations" and "Item 1. Business--Risk Factors" could cause
actual results to differ materially from those contained in forward-looking
statements made in this Report and in oral statements made by authorized
officers of the Company. When used in this Report, the words "intend,"
"estimate," "believe," "expect" and similar expressions are intended to identify
forward-looking statements.
 
   The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto, and the other
financial information included elsewhere in this Report.
 
   Set forth below is a discussion of (i) the financial condition and results
of operations of the Company for the three fiscal years ended December 31,
1998 and (ii) results of operations of MEG for the three fiscal years ended
December 31, 1997 and for the nine months ended September 30, 1998. Because of
the significant effect of the Reorganization on the Company's results of
operations, the Company's historical results of operations and period-to-
period comparisons will not be indicative of future results.
 
Overview
 
 Net Sales
 
   The Company's net sales are generated from (i) licensing the Marvel
characters for use in merchandise, promotions, feature films, television
programs, theme parks and various other areas; (ii) publishing comic books,
including related advertising revenues; and (iii) marketing and distributing
toys, including toys based on the Marvel characters, proprietary toy products
and toys based on properties licensed to the Company from third parties. On a
pro forma basis after giving effect to the Reorganization, the Fleer Sale and
the intended disposition of the Panini activity stickers and adhesive paper
business, licensing, publishing and toys would have accounted for 4%, 19% and
77%, respectively, of the Company's net sales for the year ended December 31,
1998. The Company's strategy is to increase the media exposure of the Marvel
characters through its media and promotional licensing activities, which it
believes will create revenue opportunities for the Company through sales of
toys and other licensed merchandise. In particular, the Company plans to focus
its future toy business on marketing and distributing toys based on the Marvel
characters, which provide the Company with higher margins because no license
fees are required to be paid to third parties and, because of media exposure,
require less promotion and advertising support than the Company's other toy
categories. The Company intends to use comic book publishing to support
consumer awareness of the Marvel characters and to develop new characters and
storylines.
 
   The Company records as revenue the present value of licensing fees from its
licensing activities at the time the Company's characters are available to the
licensee and the collection of licensing fees is reasonably assured. Licensing
fees booked as revenue but not yet realized are recorded as receivables.
Licensing receivables due more than one year beyond the balance sheet date are
discounted to their net present value.
 
 Operating Expenses: Cost of Sales
 
   There generally is no cost of sales associated with the licensing of the
Company's characters.
 
   Cost of sales for comic book publishing consists of art and editorial,
printing and distribution costs. Art and editorial costs account for the most
significant portion of publishing cost of sales. Art and editorial costs
consist of compensation to editors, writers and artists. The Company generally
hires writers and artists on a freelance basis but has exclusive employment
contracts with certain key writers and artists.
 
   The Company out-sources the printing of its comic books to an unaffiliated
company. The Company's cost of printing is subject to fluctuations in
commodity-based products such as paper.
 
   Cost of sales for the toy business consists of product and package
manufacturing, shipping and agents' commissions. The most significant portion
of cost of sales is product and package manufacturing. The Company, 

                                      22
<PAGE>
 
which utilizes multiple manufacturers, solicits multiple bids for each project
in order to control its manufacturing costs. A substantial portion of the
Company's toy manufacturing takes place in China. A substantial portion of the
Company's toy manufacturing contracts are denominated in Hong Kong dollars.
 
 Operating Expenses: Selling, General and Administrative
 
   Selling, general and administrative costs consist primarily of advertising,
royalties, general and administrative, warehousing and store merchandising.
The most significant portion of selling, general and administrative costs is
advertising and royalties.
 
   Advertising expense varies with the Company's product mix. In the near
term, those costs are likely to increase as the Company further promotes the
toys developed under its World Championship Wrestling (WCW/NWO) license. In
the longer term, the Company expects those costs to decrease as the Company
emphasizes toys based on the Marvel characters.
 
 

 
   Royalties are payable on toys based on characters licensed from third
parties, such as World Championship Wrestling, Universal Studios and Sony
Pictures, as well as toys developed by outside inventors. Because the Company
expects that products based on its World Championship Wrestling license will
generate a significant portion of its operating income during the next several
years, the Company believes that royalty expense paid to World Championship
Wrestling will significantly increase. There are no royalty payments for
Marvel-character-based toy products.
 
   General and administrative costs consist of salaries and corporate
overhead.
 
   The Company expects warehousing and store merchandising costs to change
over time in line with the Company's toy sales.
 
 Operating Expenses: Depreciation and Amortization
 
   Depreciation and amortization expense consists of amortization of goodwill
and other intangibles, tooling, product design and development, packaging
design and depreciation expense. Amortization expense will increase
significantly as a result of the goodwill created pursuant to the combination
of Toy Biz, Inc. and MEG, which will be amortized over an assumed 20-year
life.
 
   Tooling and product design and development and packaging design expense,
which are attributable to the toy business, are amortized over the life of the
respective product. The Company believes its tooling, product and packaging
design expense accounted for most of depreciation and amortization in 1998.
 
Results of Operations of the Company
 
 Year ended December 31, 1998 compared with year ended December 31, 1997
 
   The Company's net sales increased to $232.1 million for the year ended
December 31, 1998 from $150.8 million in the 1997 period. The increase in net
sales was partially due to the inclusion of $19.6 million in publishing and
licensing revenues in the fourth quarter of 1998 as a result of the
acquisition of MEG on October 1, 1998. Net sales in the toy division increased
$61.6 million to $212.4 million in 1998. Net sales in the domestic boys' toys
category increased $20.1 million to $63.2 million in 1998 due primarily to the
introduction of the WCW/NWO Bashin' Brawlers in the second half of 1998, which
accounted for $17.2 million in net sales. Net sales in the domestic girls'
toys category increased $3.3 million in 1998 to $42.0 million due primarily to
the increased product
 
                                      23
<PAGE>
 
line of new promotional dolls in 1998. Net sales of domestic activity toys and
other products increased $3.7 million to $31.7 million in 1998 due primarily to
shipments of products related to the Godzilla feature film released in 1998. The
Company believes that its net sales in each of its domestic toy categories was
adversely affected by Toys 'R' Us' decision to eliminate excess inventory
through a one-time reduction in inventory that resulted in significant declines
in its purchases from toy manufacturers. Net sales of toy products sold through
the import division increased $16.7 million to $47.2 million in 1998, due
primarily to shipments of Godzilla products in 1998. International net toy sales
increased $.7 million to $28.1 million in 1998. The Company recorded sales
allowances of $2.9 million in 1998 which were attributable to the impact of the
Merger on the Company's relationship with certain of its international
distributors, compared to $18.0 million of sales allowances in 1997 that the
Company believes were related to the impact of the Bankruptcy Case on Toy Biz,
Inc.'s relationships with its international distributors.
 
   Gross profit increased $60.2 million to $104.1 million for 1998 from $43.9
million in 1997 in part as a result of lower sales allowances in 1998
described above. Gross profit as a percentage of net sales increased to
approximately 45% in 1998 from approximately 29% in 1997. The inclusion of
MEG's publishing and licensing operations in the fourth quarter of 1998
resulted in $11.4 million of additional gross profit. The gross profit of the
publishing and licensing operations as a percentage of publishing and
licensing net sales was approximately 58% in the fourth quarter of 1998.
 
   Selling, general and administrative expense increased $25.0 million to
$97.1 million in 1998 from $72.1 million in 1997. Selling, general and
administrative expense as a percentage of net sales decreased to 
approximately 42% in 1998 from approximately 48% in 1997. The increase in
selling, general and administrative expense was partially due to the inclusion
of $5.7 million of publishing and licensing selling, general and
administrative expense for the fourth quarter of 1998. The increase during
1998 was also due to $11.7 million of expenses relating to the termination of
license agreements resulting from the Company's integration of MEG's
operations, as well as a $9.8 million increase in royalty and advertising
expense in 1998 primarily related to the success of the WCW/NWO Bashin'
Brawlers.
 
   Depreciation and amortization expense decreased $1.2 million to $19.3
million in 1998 from $20.5 million in 1997 primarily due to additional
amortization expense recorded in 1997 related to early write-offs of
discontinued toy products based on Marvel characters as a result of the
Bankruptcy Case.
 
   Amortization of goodwill and other intangibles increased $6.6 million to
$7.1 million in 1998 from $.5 million in 1997. The increase was due to the
amortization of goodwill created pursuant to the MEG acquisition completed on
October 1, 1998.
 
   Interest expense increased $8.6 million to $9.4 million in 1998 from $.8
million in 1997, primarily due to $8.6 million in interest expense on the
Bridge Loan for the fourth quarter of 1998.
 
   As a result of the above, the Company reported a net loss of $32.6 million
in 1998 compared to a net loss of $29.5 million in 1997. The Company reported
a loss per share after preferred dividends of $1.23 in 1998 compared to a loss
per share after preferred dividends of $1.06 in 1997.
 
 Year ended December 31, 1997 compared with year ended December 31, 1996
 
   Toy Biz, Inc.'s net sales decreased to $150.8 million for the year ended
December 31, 1997 from $221.6 million in the 1996 period. Net sales in the
domestic boys' toys category, including sublicense income, decreased $33.4
million to $43.1 million in 1997. Toy Biz, Inc.'s sales of domestic boys' toys
have decreased since the first quarter of 1996 as compared to the respective
prior periods, but Toy Biz, Inc. believes that the decrease in this category
has been accelerated as a result of concerns among retailers as to the impact
of the Bankruptcy Case on the

                                      24
<PAGE>
 
future of the Marvel brand. Net sales in the domestic girls' toys category
decreased $19.2 million to $38.7 million in 1997 due primarily to Toy Biz,
Inc.'s decision to reduce the number of promotional dolls offered for sale by
Toy Biz, Inc. during 1997 as compared to 1996. Domestic activity toy net sales
increased $1.4 million to $28.0 million in 1997 due primarily to the expansion
of the Quest model rocket division in the 1997 period. International net sales
decreased $17.6 million to $27.4 million in 1997 from $45.0 million in 1996 due
primarily to the decreased interest in Marvel products in the international
markets. Sales by Toy Biz, Inc.'s import division, which was established in late
1996, accounted for $30.5 million in sales in the 1997 period. Net sales of
other products decreased $10.7 million to $1.1 million due primarily to a
reduction in sales in the preschool category which was transferred to the import
division in 1997. Toy Biz, Inc. recorded an additional $18.0 million of sales
allowances in the 1997 period that Toy Biz, Inc. believes are attributable to
the impact of the Bankruptcy Case on Toy Biz, Inc.'s relationships with its
distributors.
 
   Gross profit decreased 58% to $43.9 million for 1997 from $105.2 million in
1996. Gross margin decreased to 29% in 1997 from 47% in 1996 due to changes in
Toy Biz, Inc.'s product mix, additional sales allowances required due to the
Bankruptcy Case and concerns among retailers about the future of the Marvel
brand and the introduction of the import division which generally has a lower
gross margin than average domestic sales.
 
   SG&A expenses increased 16% to $72.1 million (approximately 48% of net
sales) in 1997 from $61.9 million (approximately 28% of net sales) in 1996.
The increase in expenses consisted primarily of $2.3 million of additional
professional fees, $5.0 million of additional advertising expenses and $1.7
million of additional royalties expensed in the 1997 period. Toy Biz, Inc.
believes that these increases were primarily attributable to the effects of
the Bankruptcy Case on Toy Biz, Inc. This increase was partially offset by a
net reduction in selling expenses due to a decrease in sales in the 1997 period,
offset by additional salaries and related expenses attributable to Toy Biz,
Inc.'s expanded product lines.
 
   Depreciation and amortization expense increased to $21.1 million in 1997
from $16.1 million in 1996. The increase was primarily attributable to
increased amortization expense resulting from an increased investment in
product tooling and product design to support Toy Biz, Inc.'s expanded product
line and $2.5 million of additional expense resulting from early write-offs of
products.
 
   Interest expense (income), net was $362,000 and ($596,000) for the years
ended December 31, 1997 and 1996, respectively. The net change was due
primarily to Toy Biz, Inc.'s borrowing of funds in the 1997 period compared
with investing excess cash in the 1996 period.
 
   As a result of the above, Toy Biz, Inc. reported a net loss of $29.5
million and a loss per share of $1.06 for the year ended December 31, 1997.
 
Liquidity and Capital Resources
 
   The Company's primary sources of liquidity are cash on hand, including the
net proceeds of the Fleer Sale and the Notes Offering (after repayment of the
Bridge Loan), and cash flow from operations (other than the cash flow of
Panini SpA, none of which is expected to be available to the Company as a
result of the Company's decision to dispose of Panini SpA). The Company is
also seeking to obtain a new working capital facility. The Company anticipates
that its primary needs for liquidity will be to: (i) conduct its business;
(ii) meet debt service requirements; (iii) make capital expenditures; and (iv)
pay Administration Expense Claims.
 
   Net cash (used in) provided by the Company's operations during fiscal 1996,
1997 and 1998 was ($.9) million, $12.8 million and $29.0 million,
respectively. Net cash (used in) provided by MEG's operations during fiscal
1996 and 1997 was ($102.9) million and ($61.3) million, respectively. Net cash
(used in) MEG's operations during the nine months ended September 30, 1998 was
approximately ($3.8) million.
 
                                      25
<PAGE>
 
   At December 31, 1998, the Company had a working capital deficiency of
$133.4 million, due to the required repayment of the Bridge Loan. Giving
effect to the Notes Offering and the Fleer Sale, the Company would have had
working capital of $102.3 million.
 
   On October 1, 1998, the Company obtained the Bridge Loan from UBS. The
Company used a portion of the proceeds from the Notes Offering to repay the
Bridge Loan on February 25, 1999.
 
   On October 1, 1998, the Company and UBS entered into a $50 million credit
facility. There were no borrowings under that credit facility, and it was
terminated on February 25, 1999.
 
   The Company's auditors included an explanatory paragraph in their original
audit report on the Company's 1998 consolidated financial statements regarding
the ability of the Company to continue as a going concern due to the short
repayment schedule for, and certain covenant defaults under, the Bridge Loan.
Upon the completion of the Notes Offering and the repayment of the Bridge Loan
on February 25, 1999, the Company's auditors re-issued their audit report
without the going concern explanatory paragraph.
 
   The Company is seeking to obtain a new secured working capital facility
which will provide for borrowings of $60 million for seasonal working capital
requirements and general corporate purposes. The Company expects that its new
working capital facility will be a three-year facility bearing interest at
either (i) the lending bank's base rate plus 0.75% to 1.25%, depending on the
Company's financial performance, or (ii) the Eurodollar rate plus 2.25% to
2.75%, depending on the Company's financial performance. The Company expects to
be required to pay an annual commitment fee on the average daily unused portion
of the facility. Any outstanding letters of credit of the Company will reduce
the amount available under the new working capital facility. As of March 26,
1999, the Company had approximately $1.8 million in letters of credit
outstanding. The Company expects that its new working capital facility will be
secured by all of the Company's assets (other than the Company's intellectual
property and Panini) and contain various financial covenants, as well as
restrictions on new indebtedness, acquisitions and similar investments,
sales of assets, capital expenditures, payments of dividends, repurchases of
stock, prepayments of debt, issuances of guarantees and creations of liens.
The new working capital facility will probably also require an annual
reduction of outstanding borrowings to no more than $20 million for at least
45 consecutive calendar days during the period from January 1 through April 30
of each fiscal year.
 
   If the Company fails to obtain a new working capital facility from an
institutional lender, the Company expects to seek to obtain such a facility
from one or more of its stockholders. There can be no assurance that the
Company will obtain a new working capital facility on the terms described
above, on customary terms or at all. A failure to do so could have a material
adverse effect on the Company. See "Item 1. Business--Risk Factors--We may
need additional financing but be unable to obtain it."
 
   On October 1, 1998, the Company sold 9 million shares of 8% Preferred Stock
at $10 per share for an aggregate of $90 million. The 8% Preferred Stock
pays quarterly dividends on a cumulative basis on the first business day of
January, April, July and October in each year, commencing January 4, 1999.
Dividends are payable, at the option of the Board, in cash, in additional
shares of 8% Preferred Stock or in any combination thereof. The Company will
be restricted under the Indenture, and expects to be prohibited under any new
working capital facility, from making dividend payments on the 8% Preferred
Stock except in additional shares of 8% Preferred Stock. Each share of 8%
Preferred Stock may be converted, at the option of its holder, into 1.039
shares of Common Stock. The Company must redeem all outstanding shares of 8%
Preferred Stock on October 1, 2011.
 
   In accordance with the Plan, the Company paid approximately $256.4 million
on October 1, 1998 in connection with the consummation of the Plan. See "Item
1. Business--Sources and Uses of Funds to Consummate the Reorganization."
 
                                      26
<PAGE>
 
   On the consummation date of the Plan, the Company made the Initial
Administration Expense Claims Payment of $20.2 million. In December 1998, the
Company paid approximately $4.2 million of additional Administration Expense
Claims. The Company estimates that it may be required to pay between $10
million and $20 million of additional Administration Expense Claims, although
there can be no assurance as to the amount the Company will be required to
pay.
 
   The Company will be required to make the Unsecured Creditors Cash Payment
at such time as the amount thereof is determined. The Company has deposited $8
million into a trust account to satisfy the maximum amount of such payment.
 
   Capital expenditures (excluding acquisitions) by the Company during fiscal
1996, 1997 and 1998 were approximately $23.8 million, $17.7 million and $17.3
million, respectively. Capital expenditures (excluding sales and acquisitions)
by MEG during fiscal 1996, 1997 and the nine months ended September 30, 1998
were approximately $43.2 million, $17.4 million and $2.7 million,
respectively.
 
   The Company believes that cash flow from operations, together with the net
proceeds of the Fleer Sale and the Notes Offering (after repayment of the
Bridge Loan), borrowings expected to be available under a new secured working
capital facility, if obtained, and other sources of liquidity, will be
sufficient for the Company to conduct its business, meet debt service
requirements, make capital expenditures and pay Administration Expense Claims.
However, there can be no assurance that the Company's business will generate
the level of cash flow from operations that it expects or that future
borrowings will be available to the Company. If the Company's plans or
assumptions change, if the Company's assumptions prove to be inaccurate or if
the Company experiences unanticipated costs or competitive pressures, the
Company may need to seek additional capital. The Company's failure to generate
sufficient cash flow from operations or to obtain a new working capital
facility on customary terms or at all could have a material adverse effect on
its ability to conduct its business, meet debt service requirements, make
capital expenditures or pay Administration Expense Claims.
 
Seasonality
 
   The Company's annual operating performance depends, in large part, on its
sales of toys during the relatively brief Christmas selling season. During
1996, 1997 and 1998, 64%, 67% and 60%, respectively, of the Company's domestic
net toy sales were realized during the second half of the year. Management
expects that the Company's toy business will continue to experience a
significant seasonal pattern for the foreseeable future. This seasonal pattern
requires significant use of working capital mainly to build inventory during the
year, prior to the Christmas selling season, and requires accurate forecasting
of demand for the Company's products during the Christmas selling season. The
Company is seeking to obtain a new working capital facility; however, that
facility is not yet in place, and the Company might not obtain it. The failure
to obtain a working capital facility on customary terms or at all could have a
material adverse effect on the Company's business. See "--Liquidity and Capital
Resources."
 
Year 2000
 
   Through December 31, 1998, the Company incurred Year 2000 conversion costs
for its Toy Biz division of approximately $1.3 million and expects to incur an
additional $1 million in 1999. The Company is utilizing both internal and
external sources to remediate, or replace, and test Toy Biz's software for
Year 2000 modifications. The Company anticipates completing the Year 2000
project for Toy Biz by June 30, 1999.
 
   The Company is in the process of completing an assessment of Year 2000
compliance for the Marvel Licensing and Marvel Publishing operations. MEG did
not allocate resources to the Year 2000 project while it was in bankruptcy,
and as of December 31, 1998, the Company had incurred no Year 2000 conversion
costs for Marvel
 
                                      27
<PAGE>
 
Licensing or Marvel Publishing. The Company believes that it can successfully
complete the Year 2000 compliance of Marvel Licensing and Marvel Publishing by
converting their financial system into the Toy Biz financial system. The Company
expects to complete the conversion by August 1999. The Company will also make
other systems used by Marvel Licensing and Marvel Publishing Year 2000 compliant
by converting them to the Toy Biz system. Management estimates that the costs to
conform Marvel Licensing and Marvel Publishing will be approximately $500,000.
 
   The cost of the project and the date on which the Company believes that it
will complete the Year 2000 modifications are only estimates. The Company
currently believes that the Year 2000 issue will not pose significant
operational problems for its computer systems. The Company has begun to
communicate with its customers and major suppliers in order to determine
whether the Year 2000 issue will affect the ability of those companies'
computer systems to interface with the Company's systems or will otherwise
affect the ability of those companies to transact business with the Company.
The Company is not aware of any such material issues with its customers and
suppliers at this time. The Company's worst-case scenarios would be manual
performance of all accounting functions and the loss of relationships with the
Company's major customers because of the inability of the Company's computers
to interface with theirs. The Company has not developed a contingency plan to
assess the likelihood of, and to address, its worst-case scenarios. The
Company assesses its Year 2000 status regularly and will begin to develop
comprehensive contingency plans if management believes that the Company will
not complete the Year 2000 project in a timely manner. If the Company's Year
2000 project is not completed on a timely basis, or if the Company's major
customers or suppliers fail to address all the Year 2000 issues, management
believes that it could have a material adverse impact on the Company's
operations.
 
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
   Not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
   The financial statements required by this item, the report of the
independent auditors thereon and the related financial statement schedule
required by Item 14(a)(2) appear on pages F-2 to F-30. See the accompanying
Index to Financial Statements and Financial Statement Schedule on page F-1.
The supplementary financial data required by Item 302 of Regulation S-K
appears in Note 11 to the December 31, 1998 Consolidated Financial Statements.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
   Not applicable.

                                      28
<PAGE>
 

                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
Executive Officers and Directors
 
   The following table sets forth the name, age and position of each person
who serves as an executive officer or director of the Company:
 
<TABLE>
<CAPTION>
 Name                      Age Position
 ----                      --- --------
 <C>                       <C> <S>
 Morton E. Handel.........  63 Chairman of the Board of Directors
 Avi Arad.................  51 Director and Chief Creative Officer; President
                               and Chief Executive Officer of Marvel Studios
 Mark Dickstein...........  40 Director
 Eric Ellenbogen..........  42 President, Chief Executive Officer and Director
 Shelley Greenhaus........  45 Director
 James F. Halpin..........  48 Director
 Michael M. Lynton........  39 Director
 Lawrence Mittman.........  48 Director
 Isaac Perlmutter.........  56 Director
 Rod Perth................  55 Director
 Michael J. Petrick.......  37 Director
 Alan Fine................  48 President and Chief Executive Officer of Toy Biz
 David J. Fremed..........  38 Chief Financial Officer of Toy Biz
 William H. Hardie, III...  36 Executive Vice President, Business Affairs and
                               Secretary
 Robert S. Hull...........  35 Senior Vice President and Chief Financial
                               Officer
</TABLE>
 
Directors
 
   The name, principal occupation for the last five years, selected
biographical information and period of service as a director of the Company of
each director are set forth below.
 
   Morton E. Handel has been the Chairman of the Board of Directors of the
Company since October 1998 and was first appointed as a director of Toy Biz,
Inc. in June 1997. Mr. Handel is also the President of S&H Consulting Ltd., a
financial consulting group. Mr. Handel has held that position since 1990. Mr.
Handel has also held the position of Director and President of Ranger
Industries, Inc. since July 1997. Mr. Handel also serves as a director of
CompUSA, Inc., Ithaca Industries, Inc. and Concurrent Computer Corp., and was
previously Chairman of the Board of Directors and Chief Executive Officer of
Coleco Industries, Inc.
 
   Avi Arad has been the Chief Creative Officer of the Company and the
President and Chief Executive Officer of the Company's Marvel Studios Division
(which is responsible for motion picture and television licensing and
development) since October 1998. Mr. Arad has been a Director of the Company
since April 1993. From April 1993 through September 1998, Mr. Arad served as a
consultant to Toy Biz, Inc. Mr. Arad was the President and Chief Executive
Officer of New World Animation, a media production company under common
control with MEG, from April 1993 until February 1997 and held the same
position at the Marvel Studios division of MEG from February 1997 until
November 1997. At New World Animation and MEG's Marvel Studios division,
Mr. Arad served as the Executive Producer of the X-Men and the Spider-Man
animated TV series. Mr. Arad has been a toy inventor and designer for more
than 20 years for major toy companies including Mattel Inc., Hasbro, Inc. and
Tyco Toys, Inc. During his career, Mr. Arad has designed or codesigned more
than 160 toys. Mr. Arad is also the owner of Avi Arad & Associates ("Arad
Associates"), a firm engaged in the design and development of toys and the
production and distribution of television programs.
  
                                      29
<PAGE>
 
   Mark Dickstein has been a Director of the Company since October 1998. Mr.
Dickstein has been the President of Dickstein Partners Inc. since 1986 and is
primarily responsible for the operations of Dickstein & Co., L.P., Dickstein
Focus Fund L.P. and Dickstein International Limited, each of which is a private
investment fund. Mr. Dickstein also serves as a director of Hills Stores
Company, News Communications Inc., and the Leslie Fay Company, Inc.
 
   Eric Ellenbogen has been the President and Chief Executive Officer of the
Company since November 1998 and has been a Director of the Company since
October 1998. Until his appointment as Chief Executive Officer of the Company,
Mr. Ellenbogen was the President of Golden Books Family Entertainment (a
position he held from June 1998) and a Director of Golden Books Family
Entertainment (a position he held from August 1996). From August 1996 until
June 1998, Mr. Ellenbogen was the President of Golden Books' Entertainment
Division. From August 1987 until the acquisition of Broadway Video
Entertainment by Golden Books in 1996, Mr. Ellenbogen served as President of
Broadway Video, an independent motion picture and television production and
distribution company. Mr. Ellenbogen is the co-chairman of the American Film
Institute's Third Decade Council.
 
   Shelley F. Greenhaus has been a Director of the Company since October 1998.
Mr. Greenhaus has been the President and Managing Director of Whippoorwill
Associates, Inc. ("Whippoorwill"), an investment advisor which he founded,
since 1990. Whippoorwill manages investment accounts for a prominent group of
institutional and individual investors from around the world.
 
   James F. Halpin has been a Director of the Company since March 1995. Mr.
Halpin has been President, Chief Operating Officer and a director of CompUSA
Inc., a retailer of computer hardware, software, accessories and related
products, since May 1993 and Chief Executive Officer of CompUSA, Inc. since
December 1993. Mr. Halpin is also a director of both Interphase Corporation, a
manufacturer of high-performance networking equipment for computers, and
Lowe's Companies, Inc., a chain of home improvement stores.
 
   Michael Lynton has been a Director of the Company since October 1998. Mr.
Lynton has been Chairman and Chief Executive Officer of The Penguin Group
since 1996. From 1987 to 1996, at The Walt Disney Company, Mr. Lynton was
President of Hollywood Pictures and President of Disney Publishing--Magazines
and Books.
 
   Lawrence Mittman has been a Director of the Company since October 1998. Mr.
Mittman has been a partner in the law firm of Battle Fowler LLP for more than
the past five years. Mr Mittman also serves as a Director of CompUSA, Inc.
 
   Isaac Perlmutter has served as a Director of the Company since April 1993
and he served as Chairman of the Board until March 1995. Mr. Perlmutter
purchased Toy Biz, Inc.'s predecessor company from Charan Industries, Inc. in
January 1990. Mr. Perlmutter is actively involved in the management of the
affairs of Toy Biz, Inc. and has been an independent financial investor for
more than the past five years. Mr. Perlmutter is also a director of Ranger
Industries, Inc. As an independent investor, Mr. Perlmutter currently has, or
has had within the past five years, controlling ownership interests in Ranger
Industries, Inc., Remington Products Company, Westwood Industries, Inc., a
manufacturer and distributor of table and floor lamps, Job Lot Incorporated
(and its predecessor Job Lot Associates L.P.), a discount oriented retail
chain, and Tangible Media, Inc., a media buying and advertising agency.
 
   Rod Perth has been a Director of the Company since October 1998. From
October 1994 until July 1998, Mr. Perth was the President of USA Networks
Entertainment at USA Network. At USA Network, Mr. Perth was responsible for
the development and production of programming, including programming for the
Sci-Fi Channel. Prior to joining USA Network, Mr. Perth served as Senior Vice
President, Late Night and Non-Network Programming at CBS Entertainment, where
he was instrumental in the resurgence of the CBS Late Night Franchise and was
a key member of the team that brought the "Late Show with David Letterman" to
CBS. Mr. Perth joined the CBS Entertainment division in 1989 as Vice
President, Late Night Programs.

                                      30
<PAGE>
 
   Michael J. Petrick has been a Director of the Company since October 1998.
Mr. Petrick is a Managing Director of Morgan Stanley & Co. Incorporated, and
has been with Morgan Stanley since 1989. Mr. Petrick also serves as a Director
of CHI Energy, Inc. and Premium Standard Farms, Inc.
 
   All of the Company's Directors were selected pursuant to the Stockholders'
Agreement (as defined, along with other capitalized terms used in this
paragraph, in "Certain Relationships and Related Transactions--Stockholders'
Agreement"). Messrs. Handel, Arad, Dickstein, Halpin, Mittman and Perlmutter
were designated by the Investor Group (with Mr. Dickstein designated by the
Dickstein Entities) and Messrs. Ellenbogen, Greenhaus, Lynton, Perth and
Petrick were designated by the Lender Group.
 
Executive Officers
 
   The following sets forth the positions held with the Company and selected
biographical information for the executive officers of the Company who are not
Directors.
 
   Alan Fine served as a Director of the Company from June 1997 until October
1998. Mr. Fine has been the President and Chief Executive Officer of Toy Biz
since October 1998. Previously, he served as the Chief Operating Officer of
the Company, a position to which he was appointed in September 1996. From June
1996 to September 1996, Mr. Fine was the President and Chief Operating Officer
of Toy Biz International Ltd. From May 1995 to May 1996, Mr. Fine was the
President and Chief Operating Officer of Kay-Bee Toys, a national toy
retailer, and from December 1989 to May 1995, he was the Senior Vice President
General Merchandise Manager of Kay-Bee Toys.
 
   David J. Fremed serves as the Chief Financial Officer of Toy Biz. From
October 1996 to February 1999, Mr. Fremed served as the Company's Chief
Financial Officer and Treasurer. From 1990 to October 1996, Mr. Fremed served
as the Vice President/Controller of the Company. From 1986 to 1990, Mr. Fremed
served as controller of Admerex International, Inc. From 1984 to 1986, Mr.
Fremed served as Assistant Controller of Albert Frank-Guenther Law, Inc., a
subsidiary of Foote, Cone & Belding. From 1981 to 1984, Mr. Fremed served in
the audit department of Arthur Andersen & Co.
 
   William H. Hardie, III has served as the Executive Vice President, Business
Affairs and Secretary of the Company since September 1997. From May 1995
through September 1997, Mr. Hardie was the Executive Vice President, Business
Affairs and Secretary of Fleer/SkyBox International, a subsidiary of MEG. From
January 1991 to May 1995, Mr. Hardie was an associate at Jones, Walker,
Waechter, Poitevant, Carrere & Denegre in New Orleans, Louisiana.
 
   Robert S. Hull was named Senior Vice President and Chief Financial Officer
of the Company in February 1999. From 1997 until February 1999, Mr. Hull
served as Vice President and Chief Financial Officer of Wise Foods Holdings,
Inc., a snacks manufacturer and a company controlled by Kohlberg, Kravis,
Roberts & Co. From 1995 to 1997, Mr. Hull served as a Director at Borden
Capital Management Partners, a company also controlled by Kohlberg, Kravis,
Roberts & Co. From 1993 to 1995, Mr. Hull served as Vice President and Chief
Financial Officer of Altama Delta Corporation, Inc. in Atlanta, Georgia.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
   Object Trading Corp., an entity wholly owned by Mr. Perlmutter, became a
10% owner of 8% Preferred Stock on October 1, 1998 and filed a Form 3 with the
Securities and Exchange Commission to report its status as a 10% owner on
October 16, 1998, five days late. Mr. Perlmutter's filings reporting the October
1, 1998 purchase of 8% Preferred Stock by Object Trading Corp. were timely.
 
                                      31

<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION
 
   The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the Chief
Executive Officers of the Company during 1998 and the Company's four most
highly compensated executive officers, other than the Company's Chief
Executive Officers, who were serving as executive officers of the Company on
December 31, 1998 (the "Named Executive Officers"), for services rendered in
all capacities to the Company and its subsidiaries during such periods.
 
                          Summary Compensation Table
 
<TABLE>
<CAPTION>
                                                                 Long-Term
                                       Annual Compensation     Compensation
                                       ------------------- ---------------------
                                        Salary     Bonus   Securities Underlying
Name and Principal Position       Year    ($)       ($)         Options (#)
---------------------------       ---- --------- --------- ---------------------
<S>                               <C>  <C>       <C>       <C>
Eric Ellenbogen (1).............. 1998 $  57,692 $     --          960,000
  President and Chief Executive   1997       --        --              --
  Officer                         1996       --        --              --
Joseph M. Ahearn (2)............. 1998 $ 600,000 $ 450,000         100,000
  President and Chief Executive   1997   500,000   150,000             --
  Officer                         1996   350,000   150,000             --
Avi Arad (3)..................... 1998 $ 375,000 $     --        1,000,000
  Chief Creative Officer of the   1997   375,000       --              --
  Company and President and Chief
   Executive                      1996   375,000       --              --
  Officer of the Company's Marvel
   Studios
  Division
Alan Fine (4).................... 1998 $ 425,000 $ 306,875         300,000
  President and Chief Executive
   Officer                        1997   400,000   302,816             --
  of the Company's Toy Biz
   Division                       1996   253,846   117,858          30,000 (6)
David J. Fremed.................. 1998 $ 215,000 $  30,000         100,000
  Chief Financial Officer         1997   165,000    40,000             --
                                  1996   140,000    25,000             --
William H. Hardie, III (5)....... 1998 $ 260,000 $  25,000         100,000
  Executive Vice President,       1997    83,539    10,000             --
  Business Affairs                1996       --        --              --
</TABLE>
--------
(1) Mr. Ellenbogen's employment with the Company commenced in December 1998.
(2) Mr. Ahearn's employment with the Company terminated in December 1998.
(3) Mr. Arad's employment with the Company commenced in October 1998. Amounts
    shown for periods prior to October 1, 1998 represent consulting fees
    received by Mr. Arad.
(4) Mr. Fine commenced employment with the Company in May 1996, and was
    appointed as the President and Chief Executive Officer of the Company's
    Toy Biz division in the fourth quarter of 1998.
(5) Mr. Hardie's employment with the Company commenced in September 1997.
(6) Represents options granted by Toy Biz, Inc. for the purchase of 30,000
    shares of Class A Common Stock. These options have been canceled.
 
 
                                      32
<PAGE>
 
Option Grants Table
 
     The following table shows the Company's grants of stock options to the
Named Executive Officers in 1998. Each stock option grant was made under the
Stock Incentive Plan, which became unconditionally effective on January 20,
1999. The Company's 1995 Stock Option Plan has been terminated, and all stock
options that were outstanding under that plan have been canceled. No SARs
(stock appreciation rights) were granted by the Company in 1998.
<TABLE>
<CAPTION>
                                                                            Potential Realizable Value
                                                                            at Assumed Annual Rates of
                                                                             Stock Price Appreciation
                                                                                 for Option Terms
                                                                            ---------------------------
                            Number of
                            Shares of     Percent of
                          Common Stock   Total Options
                           Underlying     Granted to   Exercise
                             Options      Employees      Price   Expiration
          Name           Granted in 1998   in 1998     per share    Date         5%            10%
          ----           --------------- ------------- --------- ---------- ------------- -------------
<S>                      <C>             <C>           <C>       <C>        <C>           <C>
Eric Ellenbogen (1).....         960,000     24.3%      $ 6.125    12/7/08  $   3,697,932 $   9,370,956
Joseph M. Ahearn (2)....         100,000      2.5%        6.125   11/17/03        169,234       373,931
Avi Arad (3)............       1,000,000     25.3%        6.125   11/19/08      3,852,013     9,761,413
Alan Fine (4)...........         300,000      7.6%        6.125   11/17/08      1,155,604     2,928,424
David J. Fremed (5).....         100,000      2.5%        5.875   11/23/08        369,479       936,299
William H. Hardie, III
 (6)....................         100,000      2.5%        5.875   11/23/08        369,479       936,299
</TABLE>
 
--------
(1) Mr. Ellenbogen's options become exercisable in four equal installments:
    options to buy 240,000 shares of Common Stock are exercisable immediately;
    options to buy an additional 240,000 shares of Common Stock become
    exercisable on December 7, 1999; options to buy an additional 240,000
    shares of Common Stock become exercisable on December 7, 2000; and options
    to buy an additional 240,000 shares of Common Stock become exercisable on
    December 7, 2001.

(2) Mr. Ahearn's options become exercisable in four equal installments:
    options to buy 25,000 shares of Common Stock are exercisable immediately;
    options to buy an additional 25,000 shares of Common Stock become
    exercisable on November 17, 1999; options to buy an additional 25,000
    shares of Common Stock become exercisable on November 17, 2000; and
    options to buy an additional 25,000 shares of Common Stock become
    exercisable on November 17, 2001.

(3) Mr. Arad's options become exercisable in four equal installments: options
    to buy 250,000 shares of Common Stock are exercisable immediately; options
    to buy an additional 250,000 shares of Common Stock become exercisable on
    November 19, 1999; options to buy an additional 250,000 shares of Common
    Stock become exercisable on November 19, 2000; and options to buy an
    additional 250,000 shares of Common Stock become exercisable on November
    19, 2001.

(4) Mr. Fine's options become exercisable in four equal installments: options
    to buy 75,000 shares of Common Stock are exercisable immediately; options
    to buy an additional 75,000 shares of Common Stock become exercisable on
    November 17, 1999; options to buy an additional 75,000 shares of Common
    Stock become exercisable on November 17, 2000; and options to buy an
    additional 75,000 shares of Common Stock become exercisable on November
    17, 2001.

(5) Mr. Fremed's options become exercisable in four equal installments:
    options to buy 25,000 shares of Common Stock are exercisable immediately;
    options to buy an additional 25,000 shares of Common Stock become
    exercisable on November 23, 1999; options to buy an additional 25,000
    shares of Common Stock become exercisable on November 23, 2000; and
    options to buy an additional 25,000 shares of Common Stock become
    exercisable on November 23, 2001.

(6) Mr. Hardie's options become exercisable in four equal installments:
    options to buy 25,000 shares of Common Stock are exercisable immediately;
    options to buy an additional 25,000 shares of Common Stock become
    exercisable on November 23, 1999; options to buy an additional 25,000
    shares of Common Stock become exercisable on November 23, 2000; and
    options to buy an additional 25,000 shares of Common Stock become
    exercisable on November 23, 2001.
 
                                      33
<PAGE>
 
Year-End 1998 Option Value Table
 
   The following table shows the number and value of exercisable and
unexercisable stock options held by the Named Executive Officers at December
31, 1998. None of the Named Executive Officers exercised stock options during
1998.
 
<TABLE>
<CAPTION>
                               Number of Shares of            Value of
                             Common Stock Underlying         Unexercised
                             Unexercised Options at    In-the-Money Options at
                                  Year-End (1)                Year-End
                            ------------------------- -------------------------
           Name             Exercisable Unexercisable Exercisable Unexercisable
           ----             ----------- ------------- ----------- -------------
<S>                         <C>         <C>           <C>         <C>
Eric Ellenbogen............     240,000       720,000  $ 15,000     $ 45,000
Joseph M. Ahearn...........      25,000        75,000     1,563        4,688
Avi Arad...................     250,000       750,000    15,625       46,875
Alan Fine..................      75,000       225,000     4,688       14,063
David J. Fremed............      25,000        75,000     7,813       23,438
William H. Hardie, III.....      25,000        75,000     7,813       23,438
</TABLE>
--------
(1) Represents shares of Common Stock underlying stock options. None of the
    Named Executive Officers holds SARs (stock appreciation rights).
 
Compensation of Directors
 
   Non-employee directors currently receive an annual retainer of $25,000 and
an annual grant of 10,000 shares of Common Stock to be immediately vested.
Non-employee directors also receive a one-time grant of five-year options to
purchase 20,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on the date of the grant. Those options
expire within 90 days following the date a director ceases to serve on the
Board and vest one-third on the date of the grant and one-third on each of the
two succeeding anniversaries of the grant. In addition, the chairmen of the
Compensation and Nominating Committee and the Audit Committee receive an
annual retainer of $5,000, and the non-executive Chairman of the Board
receives an annual payment of $100,000 and a one-time grant of options to
purchase 30,000 shares of Common Stock on the same terms as those applicable
to the options made available to the other non-employee members of the Board.
 
   Members of the Board who are officers or employees of the Company or any of
its subsidiaries do not receive compensation for serving in their capacity as
directors.
 
Employment Agreements
 
   The Company has entered into employment agreements with each of the
following executive officers: Avi Arad, the Company's Chief Creative Officer
and the President and Chief Executive Officer of the Company's Marvel Studios
Division; Eric Ellenbogen, the President and Chief Executive Officer of the
Company; Alan Fine, the President and Chief Executive Officer of the Company's
Toy Biz Division; David J. Fremed, the Chief Financial Officer of the
Company's Toy Biz Division; William H. Hardie, III, the Company's Executive
Vice President--Business Affairs; and Robert S. Hull, Senior Vice President
and Chief Financial Officer of the Company. In addition, the Company has
amended its employment agreement with Joseph M. Ahearn, who is no longer
employed by the Company.
 
   Employment and License Agreements with Mr. Arad. Pursuant to his employment
agreement, Mr. Arad has agreed to render his exclusive and full-time services
to the Company for a term of employment expiring on December 31, 2000. Under
his employment agreement, Mr. Arad receives a base salary, subject to
discretionary increases, of $375,000. Mr. Arad is entitled to discretionary
bonuses and participation in the Company's stock option plan as 
 
                                      34
<PAGE>
 
determined by the Board. Mr. Arad also is entitled to the use of an automobile
with driver and is entitled to participate in employee benefit plans generally
available to the Company's employees. Mr. Arad's employment agreement provides
that, in the event of termination other than for cause, Mr. Arad is entitled to
his salary earned through the date of termination and thereafter for a period of
up to twelve months. Mr. Arad's employment agreement replaces his consulting
agreement with the Company, under which Mr. Arad also earned $375,000 per year.
 
   In addition, the Company and Arad Associates, of which Mr. Arad is the sole
proprietor, are parties to a license agreement which provides that Arad
Associates is entitled to receive royalty payments on net sales of Marvel-
character-based toys and on net sales of non-Marvel-character-based toys of
which Mr. Arad is the inventor of record. In no event, however, may the total
royalties payable to Arad Associates during any calendar year exceed $7.5
million. The Company accrued royalties to Mr. Arad for toys he invented or
designed of approximately $1.8 million, $3.6 million and $4.3 million during
the years ended December 31, 1996, 1997 and 1998, respectively. In September
1998, the license with Arad Associates was amended to provide that Arad
Associates will receive an annual royalty of $650,000 for products based on
the Marvel characters (the former royalty rate was 4%). The amendment leaves
intact a provision that Arad Associates is to receive a negotiated royalty not
to exceed 5% of net sales of products not based on the Marvel characters.
 
   Employment Agreement with Mr. Ellenbogen. Pursuant to his employment
agreement, Mr. Ellenbogen has agreed to render his exclusive and full-time
services to the Company for a term of employment expiring on December 7, 2001.
Under his employment agreement, Mr. Ellenbogen receives a base salary, subject
to discretionary increases, of $750,000. Mr. Ellenbogen is eligible to earn an
annual bonus based on the attainment of certain performance goals. The target
annual bonus is equal to the greater of (i) 60% of Mr. Ellenbogen's base
salary or (ii) the highest target level of annual bonus award to any other
executive officer, and is to be paid half in cash, half in Common Stock.
 
   Mr. Ellenbogen's employment agreement provides that, in the event of
termination, Mr. Ellenbogen is entitled to certain payments and benefits
depending on the circumstances of the termination. Upon a change in control of
the Company, Mr. Ellenbogen will be entitled to a severance payment equal to
three times the sum of his base salary and half his average bonus. If any
payments to Mr. Ellenbogen under his employment agreement ("Parachute
Payments") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code, then Mr. Ellenbogen will be entitled to receive an
additional payment from the Company (a "Gross-Up Payment") in an amount such
that Mr. Ellenbogen retains, after the payment of all taxes, an amount of the
Gross-Up Payment equal to the excise tax imposed on the Parachute Payments.
 
   Pursuant to his employment agreement, Mr. Ellenbogen has been granted
options to purchase 960,000 shares of Common Stock. The options expire in
December 2008 and vest over a three-year period. The options become
exercisable in full upon a change in control of the Company. Mr. Ellenbogen is
also entitled to participate in employee benefit plans generally available to
the Company's employees.
 
   Employment Agreement with Mr. Fine. Pursuant to his employment agreement,
Mr. Fine has agreed to render his exclusive and full-time services to the
Company for a term of employment expiring on December 31, 1999. Under his
employment agreement, Mr. Fine receives a base salary, subject to
discretionary increases, of $425,000. Mr. Fine is eligible to earn an annual
bonus based on the attainment of certain performance goals. The employment
agreement further provides for participation in the Company's stock option
plan as determined by the Board. Mr. Fine also receives a $1,000 monthly
automobile allowance and is entitled to participate in employee benefit plans
generally available to the Company's employees.
 
                                      35
<PAGE>
 
   Mr. Fine's employment agreement provides that, in the event of termination
other than for cause, Mr. Fine is entitled to his salary and car allowance
earned through the date of termination and thereafter for a period up to twelve
months. Mr. Fine is also entitled to the pro rata portion of his annual bonus
earned through the date of termination. 

   Employment Agreement with Mr. Fremed. Pursuant to his employment agreement,
Mr. Fremed has agreed to render his exclusive and full-time services to the
company for a term of employment expiring on December 31, 2000. Under his
employment agreement, Mr. Fremed receives a base salary, subject to
discretionary increases, of $215,000. Mr. Fremed is entitled to a bonus of
$30,000 per year plus discretionary bonuses and participation in the Company's
stock option plan as determined by the Board. Mr. Fremed also receives a $750
monthly automobile allowance and is entitled to participate in employee benefit
plans generally available to the Company's employees.

   Mr. Fremed's employment agreement provides that, in the event of
termination other than for cause, Mr. Fremed is entitled to his salary and car
allowance earned through the date of termination and thereafter for a period
up to nine months.
 
   Employment Agreement with Mr. Hardie. Pursuant to his employment agreement,
Mr. Hardie has agreed to render his exclusive and full-time services to the
Company for a term of employment expiring on August 31, 2000. Under his
employment agreement, Mr. Hardie receives a base salary, subject to
discretionary increases, of $250,000. Mr. Hardie is entitled to a bonus of
$25,000 per year plus discretionary bonuses and participation in the Company's
stock option plan as determined by the Board. Mr. Hardie also receives a $700
monthly automobile allowance and is entitled to participate in employee
benefit plans generally available to the Company's employees. Mr. Hardie's
bonus for the four months of his employment in 1997 was $10,000.
 
   Mr. Hardie's employment agreement provides that, in the event of
termination at any time after March 1, 1999 other than for cause, Mr. Hardie
is entitled to a lump sum of $130,000 as well as $130,000 paid over the six-
month period immediately following termination. Mr. Hardie also forfeits any
and all stock options granted to him. Further, Mr. Hardie shall provide at
least five hours of consulting services per week in connection with the
transition of his activities for a six-month period following termination.
 
   Employment Agreement with Mr. Hull. Pursuant to his employment agreement,
Mr. Hull has agreed to render his services to the Company for a term of
employment expiring on February 4, 2002. Under his employment agreement, Mr.
Hull receives a base salary of $285,000, subject to annual 10% increases
starting in February 2000. Mr. Hull is entitled to a bonus in 1999 of up to
half of his base salary, payable half in cash and half in Common Stock. Mr.
Hull also receives a $1,000 monthly automobile allowance and is entitled to
participate in employee benefit plans available to similarly situated
employees of the Company. Mr. Hull's employment agreement includes a one-year
severance provision including base salary and any applicable bonus
opportunity. Pursuant to his employment agreement, Mr. Hull has been granted
options to purchase 200,000 shares of Common Stock. The options will vest over
a three-year period.
 
   Employment Agreement with Mr. Ahearn. The Company has amended its
employment agreement with Mr. Ahearn. Mr. Ahearn was the Chief Executive
Officer and a Director of the Company from April 1993 to November 1998 and the
President of the Company from November 1994 to November 1998. Under his
employment agreement, Mr. Ahearn received a base salary, subject to
discretionary increases, of $600,000. The employment agreement further
provided for the payment of discretionary bonuses and participation in the
Company's stock option plan as determined by the Board. Mr. Ahearn also
received a $1,000 monthly automobile allowance and was entitled to participate
in all employee benefit plans generally available to the Company's employees.
The amendment to Mr. Ahearn's employment agreement provides that until the
earlier of December 31, 2000 or the date on which Mr. Ahearn obtains other
employment providing him with comparable coverage, the Company will continue
to provide Mr. Ahearn with the health and hospitalization insurance coverage
which the Company generally provides to its senior executive officers. Mr.
Ahearn has also received, pursuant to the amendment to his employment
agreement, 

                                      36
<PAGE>
 
a special bonus of $450,000. In lieu of regular payments of base salary, on each
of January 4, 1999 and January 3, 2000, the Company will pay Mr. Ahearn $575,000
followed by $25,000 in bi-weekly payments of $1,000 each.
 
   Confidential Information and Related Provisions. Each of the employment
agreements with Messrs. Arad, Fine, Fremed and Ahearn prohibits disclosure of
proprietary and confidential information regarding the Company and its business
to anyone outside the Company both during and subsequent to employment and
otherwise provides that all inventions made by the employees during their
employment belong to the Company. In addition, those employees agree during
their employment, and for one year thereafter, not to engage in any competitive
business activity. Mr. Ellenbogen's employment agreement prohibits disclosure of
proprietary and confidential information regarding the Company and its business
to anyone outside the Company both during and subsequent to employment.
 
Compensation Committee Interlocks and Insider Participation
 
   Messrs. Dickstein, Handel, Halpin, Lynton and Petrick serve now, and served
during 1998, on the Company's Compensation and Nominating Committee. In
addition, Mr. Perlmutter and the Company's former director Donald E. Rosenblum
served on that committee's predecessor during 1998. None of the individuals
mentioned above was an officer or employee of the Company, or any of its
subsidiaries, during 1998 or formerly. Mr. Handel is, and Mr. Perlmutter once
was, the Company's non-executive Chairman of the Board.
 
 Stockholders' Agreement
 
   The Company and the following stockholders are parties to a Stockholders'
Agreement (the "Stockholders' Agreement") dated as of October 1, 1998:
 
  (1) (i) Avi Arad, (ii) Isaac Perlmutter, (iii) Isaac Perlmutter T.A., (iv)
      The Laura and Isaac Perlmutter Foundation Inc., (v) Object Trading
      Corp., and (vi) Zib Inc. (the "Perlmutter/Arad Group");
 
  (2) (i) Mark Dickstein, (ii) Dickstein & Company, L.P., (iii) Dickstein
      Focus Fund L.P., (iv) Dickstein International Limited, (v) Elyssa
      Dickstein, Jeffrey Schwarz and Alan Cooper as Trustees U/T/A/D
      12/27/88, Mark Dickstein, Grantor, (vi) Mark Dickstein and Elyssa
      Dickstein, as Trustees of the Mark and Elyssa Dickstein Foundation, and
      (vii) Elyssa Dickstein (the "Dickstein Entities" and, together with the
      Perlmutter/Arad Group, the "Investor Group"); and
 
  (3) (i) The Chase Manhattan Bank, (ii) Morgan Stanley & Co. Incorporated
      ("Morgan Stanley"), and (iii) Whippoorwill as agent of and/or general
      partner for certain accounts and funds (the "Lender Group").
      
   The Stockholders' Agreement provides that its parties will take such action
as may reasonably be in their power to cause the Board to include, subject to
certain conditions, six directors designated by the Investor Group (one of
whom, subject to certain conditions, shall be designated by the Dickstein
Entities) and five directors designated by the Lender Group. The number of
directors that the Investor Group, the Dickstein Entities and the Lender Group
may designate will be reduced following June 30, 2000 in the event of
decreases in beneficial ownership of capital stock of the Company below
certain pre-determined levels, as set forth in the Stockholders' Agreement.
The Stockholders' Agreement provides for the creation of various committees of
the Board as well as the composition of those committees.
 
   The parties to the Stockholders' Agreement have the power to vote, in the
aggregate, 64.7% in combined voting power of the outstanding shares of Common
Stock and 8% Preferred Stock.
 
                                      37
<PAGE>
 
 Registration Rights Agreements
 
   Mr. Dickstein and certain of his affiliates, Object Trading Corp. (an
affiliate of Mr. Perlmutter), Whippoorwill as agent for and/or general partner
for certain institutions and funds, the Company and certain other parties are
parties to a Registration Rights Agreement dated as of October 1, 1998 (the
"October Registration Rights Agreement"). Mr. Arad, Mr. Perlmutter, certain
affiliates of Mr. Perlmutter (other than Object Trading Corp.) and the Company
are parties to a Registration Rights Agreement dated as of December 8, 1998
(the "December Registration Rights Agreement").
 
   The terms of the December Registration Rights Agreement are substantially
identical to those of the October Registration Rights Agreement. Under the terms
of each of the Registration Rights Agreements, the Company has agreed to file a
shelf registration statement under the Securities Act registering the resale of
all shares of Common Stock and 8% Preferred Stock issued to the stockholder
parties thereto pursuant to the Plan, all shares of Common Stock issuable upon
conversion of those shares of 8% Preferred Stock, certain convertible debt
securities that the Company may exchange for the 8% Preferred Stock and the
Common Stock issuable upon conversion thereof and all shares of Common Stock
otherwise owned by the stockholder parties to the respective Registration Rights
Agreement as of the date thereof. The Registration Rights Agreements also give
the stockholder parties thereto piggyback registration rights with respect to
underwritten public offerings by the Company of its equity securities.
 
 Agreements Relating to the Purchase of Preferred Shares
 
   Zib (an entity owned entirely by Mr. Perlmutter), Dickstein Partners Inc.
(an affiliate of Mr. Dickstein) and Toy Biz, Inc. entered into a Commitment
Letter, dated November 19, 1997, in which Zib and Dickstein Partners Inc.
committed to purchase $60 million and $30 million in amount, respectively, of
the 8% Preferred Stock of the Company to be issued pursuant to the Plan.
Pursuant to the Plan and a Stock Purchase Agreement dated as of October 1,
1998, (i) certain secured creditors of MEG purchased, pursuant to an option in
the Plan, $20,071,480 in amount of 8% Preferred Stock that would otherwise
have been purchased by Zib; (ii) Whippoorwill, as agent of and/or general
partner for certain institutions and funds, purchased, pursuant to an
assignment from Zib, $5 million in amount of 8% Preferred Stock that would
otherwise have been purchased by Zib; (iii) Zib purchased $34,928,520 in
amount of 8% Preferred Stock; and (iv) Dickstein Partners Inc. and its
assignees purchased $30 million in amount of 8% Preferred Stock.
 
 Tangible Media Advertising Services
 
   Tangible Media, a corporation which is wholly owned by Mr. Perlmutter, acts
as the Company's media consultant in placing certain of the Company's
advertising and, in connection therewith, receives certain fees and
commissions based on the cost of the placement of such advertising. Tangible
Media received payments of fees and commissions from the Company totaling
approximately $965,000, $1,274,000 and $1,147,000 in 1996, 1997 and 1998,
respectively. The Company retains the services of a non-affiliated media
consulting agency on matters of advertising creativity.
 
 Employee, Office Space and Overhead Cost Sharing Arrangements
 
   The Company and Tangible Media have shared certain space at the Company's
principal executive offices and related overhead expenses. Since 1994,
Tangible Media and the Company have been parties to an employee, office space
and overhead cost sharing agreement governing the Company's sharing of
employees, office space and overhead expenses (the "Cost Sharing Agreement").
Under the Cost Sharing Agreement, any party thereto may through its employees
provide services to another party, upon request, whereupon the party receiving
services shall be obligated to reimburse the providing party for the cost of
such employees' salaries and benefits accrued for the time devoted by such
employees to providing services. Under the Cost Sharing Agreement, Tangible
Media is obligated to reimburse the Company for 18% of the rent paid under the
sublease for the space, which obligations 
 
                                      38

<PAGE>
 
reflect the approximate percentage of floor space occupied by Tangible Media.
The Cost Sharing Agreement also requires Tangible Media to reimburse the Company
for any related overhead expenses comprised of commercial rent tax, repair and
maintenance costs and telephone and facsimile services, in proportion to its
percentage occupancy. The Cost Sharing Agreement is coterminous with the term of
the Company's sublease for its executive offices. The Company paid approximately
$245,000 and $38,000 in 1996 and 1997, respectively, to Tangible Media under
this Agreement. Tangible Media paid approximately $147,000 to the Company in
1998 under this Agreement.
 
 Showroom Sharing Arrangement
 
   Under an expense sharing arrangement with MEG and with Classic Heroes and REC
Sound, affiliated companies controlled by Mr. Perlmutter (collectively, the
"Showroom Affiliates"), Toy Biz, Inc. and the Showroom Affiliates shared
showroom space and related overhead expenses. From 1995 to 1998, MEG and Toy
Biz, Inc. were, and until the end of 1995 Classic Heroes and REC Sound were
also, parties to a showroom space sharing agreement (the "Showroom Sharing
Agreement"). Under the Showroom Sharing Agreement, MEG was obligated to
reimburse Toy Biz, Inc. for 30% of the rent paid under the lease for the
showroom space, which obligations reflect the percentage of floor space occupied
by MEG. The agreement also required MEG to reimburse Toy Biz, Inc. for any
related overhead expenses comprised of commercial rent tax, repair and
maintenance costs and telephone and facsimile service, in proportion to their
percentage occupancy, except that overhead expenses which inure to the benefit
of a single party shall be reimbursed entirely by such party. Toy Biz, Inc. was
reimbursed approximately $47,000 in 1996 under the Showroom Sharing Agreement
and accrued approximately $26,000 as being due from MEG for 1997. The Showroom
Sharing Agreement is no longer in effect.
 
 Old Stockholders' Agreement
 
   In connection with Toy Biz, Inc.'s initial public offering, MEG, Mr.
Perlmutter, two affiliates of Mr. Perlmutter through which Mr. Perlmutter held
his shares of Class A Common Stock, Mr. Arad and Toy Biz, Inc. entered into a
stockholders' agreement (the "Old Stockholders' Agreement") which provided,
among other things, that MEG and Messrs. Perlmutter and Arad would each vote
their respective shares of common stock of Toy Biz, Inc. to elect as directors
of Toy Biz, Inc. (i) eight persons designated by MEG, (ii) two persons
designated by Mr. Perlmutter and (iii) one person designated by Mr. Arad. The
Old Stockholders' Agreement also permitted certain pledges of Class B Common
Stock owned by MEG and its permitted transferees. The Old Stockholders'
Agreement provided that, if MEG ceased to be controlled by Ronald O. Perelman,
MEG would be obligated to convert its shares of Class B Common Stock (which
possessed ten votes per share) into Class A Common Stock (which possessed one
vote per share), unless each of Messrs. Perlmutter and Arad consented to such
shares remaining as Class B Common Stock. The Old Stockholders' Agreement also
provided that it would terminate upon, among other events, the conversion into
Class A Common Stock of the Class B Common Stock held by MEG pursuant to a
change in control of MEG. The Old Stockholders' Agreement is no longer in
effect, and the Company now has only one class of Common Stock.
 
 Old Registration Rights Agreement
 
   Toy Biz, Inc. entered into a registration rights agreement with MEG, Mr.
Arad and Mr. Perlmutter (the "Old Registration Rights Agreement"), pursuant to
which they and certain of their transferees had the right, subject to certain
conditions, to require Toy Biz, Inc. to register under the Securities Act, all
or any portion of the shares of Class A Common Stock held by each of them on
two occasions. In addition, MEG, Mr. Arad, Mr. Perlmutter and certain of their
transferees had certain rights to participate in such registrations and in
other registrations by Toy Biz, Inc. of its Class A Common Stock. Toy Biz,
Inc. was obligated to pay any expenses incurred in connection with such
registrations, except for underwriting discounts and commissions attributable
to the shares of Class A Common Stock sold by MEG, Mr. Arad, Mr. Perlmutter,
and certain of their transferees pursuant to such registrations. The Old
Registration Rights Agreement is no longer in effect.
 
                                      39
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The table on the following page sets forth certain information regarding the 
beneficial ownership of Common Stock and 8% Preferred Stock, as of March 22, 
1999, by (i) each person known by the Company to be the beneficial owner of 5% 
or more of the outstanding Common Stock or 8% Preferred Stock (based, in part, 
upon copies of all Schedules 13D and 13G provided to the Company), (ii) each 
director of the Company, (iii) each executive officer of the Company as a group.
Because the voting or dispositive power of certain shares listed in the table is
shared, the same securities are sometimes listed opposite more than one name 
in the table and the sharing of voting or dispositive power is described in a 
footnote. The total number of shares of Common Stock and 8% Preferred Stock 
listed below for directors and executive officers as a group eliminates such 
duplication.

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

   Under the rules of the Securities and Exchange Commission, beneficial
ownership of a share of 8% Preferred Stock constitutes beneficial ownership of
1.039 shares of Common Stock (the amount into which the 8% Preferred Stock is
convertible). Beneficial ownership of Common Stock is shown in the main part
of the table and the portion of that beneficial ownership traceable to
beneficial ownership of 8% Preferred Stock is set forth in the footnotes.
 
   The Schedules 13D and 13G that the Company used in compiling the table take
differing positions as to whether shares of stock covered by the Stockholders'
Agreement are held with "shared voting power." The table does not attempt to
reconcile those differences.
 
                                      40
<PAGE>
 
                   Shares of Common Stock Beneficially Owned
 
<TABLE>
<CAPTION>
                                    Sole                             Sole Dispositive   Shared Dispositive
                                Voting Power    Shared Voting Power        Power              Power
 Five Percent Stockholders,  ------------------ ------------------- ------------------- ------------------
         Directors                     Percent             Percent             Percent            Percent
   and Executive Officers     Number   of Class   Number   of Class   Number   of Class  Number   of Class
 --------------------------  --------- -------- ---------- -------- ---------- -------- --------- --------
<S>                          <C>       <C>      <C>        <C>      <C>        <C>      <C>       <C>
Avi Arad (1)................       --       *   33,533,436   71.9%   4,400,000   13.0%        --       *
 1698 Post Road East
 Westport, Connecticut 06880
Isaac Perlmutter (2)........       --       *   33,533,436   71.9%  13,257,822   35.6%        --       *
 P.O. Box 1028
 Lake Worth, Florida 33460
Mark Dickstein (3)..........    64,167      *    5,439,000   14.6%      64,167      *   5,439,000   14.6%
 c/o Dickstein Partners Inc.
 660 Madison Avenue
 16th Floor
 New York, New York 10021
The Chase Manhattan
 Corporation (4)............       --       *   33,533,436   71.9%   2,112,440    6.1%        --       *
 270 Park Avenue
 New York, New York 10017
Morgan Stanley & Co.
 Incorporated (5)...........       --       *   33,533,436   71.9%         --       *   4,565,821   12.7%
 1585 Broadway
 New York, New York 10036
Whippoorwill Associates,
 Inc. as agent of and/or
 general partner for certain
 institutions and funds
 (6)........................       --       *    3,565,839   10.0%         --       *   3,565,839   10.0%
 11 Martine Avenue
 White Plains, NY 10606
Value Partners, Ltd......... 3,459,845   10.1%         --       *    3,459,845   10.1%        --       *
 Suite 808
 4514 Cole Avenue
 Dallas, Texas 75205
Morton E. Handel (7)........    27,667      *          --       *          --       *         --       *
Eric Ellenbogen (8).........   240,000      *          --       *          --       *         --       *
Shelley F. Greenhaus (9)....    16,667      *          --       *          --       *         --       *
James F. Halpin (10)........    21,667      *          --       *          --       *         --       *
Michael M. Lynton (10)......    16,667      *          --       *          --       *         --       *
Lawrence Mittman (10).......    16,667      *          --       *          --       *         --       *
Rod Perth (10)..............    16,667      *          --       *          --       *         --       *
Michael J. Petrick..........       --       *          --       *          --       *         --       *
Alan Fine (11)..............    75,000      *          --       *          --       *         --       *
David J. Fremed (12)........    25,000      *          --       *          --       *         --       *
William H. Hardie, III
 (12).......................    25,000      *          --       *          --       *         --       *
Robert S. Hull..............       --       *          --       *          --       *         --       *
Joseph M. Ahearn (13).......    25,100      *          --       *          --       *         --       *
All current executive officers 
 and directors as a group (15
 persons) (14)..............   545,169    1.6%  33,533,436   71.9%  17,721,989   43.0%  5,443,000   14.6%
</TABLE>
--------
 * Less than 1%.
 (1)  Figures include 250,000 shares of Common Stock subject to stock options
      granted to Mr. Arad pursuant to the Stock Incentive Plan which are
      immediately exercisable. Mr. Arad is a party to the Stockholders'
      Agreement. Except for the 4,400,000 shares over which Mr. Arad may be
      deemed to have sole dispositive power, shares over which Mr. Arad may be
      deemed to have shared voting power (which include shares of Common Stock
      underlying 12,358,929 shares of 8% Preferred Stock) are beneficially
      owned by other parties to the Stockholders' Agreement and it is only by
      reason of Mr. Arad's position as a party to the Stockholders' Agreement
      that Mr. Arad may be deemed to possess that shared voting power.
 
(2)  Mr. Perlmutter is a party to the Stockholders' Agreement.
 
     (a)  Figures include 6,667 shares of Common Stock subject to stock
     options granted to Mr. Perlmutter pursuant to the Stock Incentive Plan
     which are immediately exercisable. Other shares over which Mr. Perlmutter
     may be deemed to have sole dispositive power are directly held as
     follows:

                                      41

<PAGE>
 
<TABLE>
<CAPTION>
                                                   Shares of    Shares of 8%
                        Holder                    Common Stock Preferred Stock
                        ------                    ------------ ---------------
      <S>                                         <C>          <C>
      Zib........................................  9,256,000            --
      The Laura and Isaac Perlmutter Foundation
       Inc.......................................    250,000            --
      Object Trading Corp........................     33,500      3,562,710
      Isaac Perlmutter...........................     10,000            --
</TABLE>
 
    The sole stockholder of Zib, a Delaware corporation, is Isaac Perlmutter
    T.A., a Florida trust (the "Perlmutter Trust"). Mr. Perlmutter is a trustee
    and the sole beneficiary of the Perlmutter Trust, and may revoke it at any
    time. Mr. Perlmutter is a director and the president of the Laura and Isaac
    Perlmutter Foundation Inc., a Florida not-for-profit corporation. Mr.
    Perlmutter is the sole stockholder of Object Trading Corp., a Delaware
    corporation. Mr. Perlmutter may be deemed to possess (i) the power to vote
    and dispose of the shares of Common Stock beneficially owned by Zib and
    Object Trading Corp. and (ii) the power to direct the vote and disposition
    of the shares of Common Stock beneficially owned by the Laura and Isaac
    Perlmutter Foundation Inc.

    (b) Except for the 13,257,822 shares over which Mr. Perlmutter may be
    deemed to have sole dispositive power (which include shares of Common
    Stock underlying 3,562,710 shares of 8% Preferred Stock), shares over
    which Mr. Perlmutter may be deemed to have shared voting power (which
    include shares of Common Stock underlying 12,358,929 shares of 8%
    Preferred Stock) are beneficially owned by parties to the Stockholders'
    Agreement which are unaffiliated with Mr. Perlmutter and it is only by
    reason of Mr. Perlmutter's position as a party to the Stockholders'
    Agreement that Mr. Perlmutter may be deemed to possess that shared voting
    power.

 (3)  Shares over which Mr. Dickstein may be deemed to have sole voting and
      dispositive power include 6,667 shares of Common Stock subject to stock
      options granted pursuant to the Stock Incentive Plan which are
      immediately exercisable. Mr. Dickstein is a party to the Stockholders'
      Agreement. Shares over which Mr. Dickstein may be deemed to have shared
      voting power are directly held as follows:
 
<TABLE>
<CAPTION>
                                                    Shares of    Shares of 8%
                       Holder                      Common Stock Preferred Stock
                       ------                      ------------ ---------------
   <S>                                             <C>          <C>
   Dickstein & Co., L.P...........................  1,458,029      2,468,002
   Dickstein Focus Fund L.P.......................    170,620        237,229
   Dickstein International Limited................    134,967        821,994
   Mark Dickstein and Elyssa Dickstein, as trust-
    ees of The Mark and Elyssa Dickstein Founda-
    tion..........................................        --          10,200
</TABLE>
  (a) Dickstein & Co., L.P. is a Delaware limited partnership.

  (b) Dickstein Focus Fund L.P. is a Delaware limited partnership.

  (c) Dickstein International Limited is a limited-liability, open-end
      investment fund incorporated as an international business company in
      the Territory of the British Virgin Islands.

  (d) The Mark and Elyssa Dickstein Foundation is a New York trust organized
      to be exempt from federal income taxes under Section 501(c)(3) of the
      Internal Revenue Code.

  (e) Dickstein Partners Inc., a Delaware corporation, is the advisor to
      Dickstein International Limited and is the general partner of Dickstein
      Partners, L.P., a Delaware limited partnership which in turn is the
      general partner of both Dickstein & Co., L.P. and Dickstein Focus Fund
      L.P. By reason of his position as president and sole director of
      Dickstein Partners Inc., Mr. Dickstein may be deemed to possess the
      power to vote and dispose of the shares of Common Stock and 8%
      Preferred Stock beneficially owned by Dickstein & Co., L.P., Dickstein
      Focus Fund L.P. and Dickstein International Limited. By reason of his
      position as a trustee of the Mark and Elyssa Dickstein Foundation, Mr.
      Dickstein may be deemed to possess the power to direct the vote and
      disposition of the shares of 8% Preferred Stock (and underlying Common
      Stock) beneficially owned by the Mark and Elyssa Dickstein Foundation.

  (f) Not included in the table are the shares of Common Stock that underlie
      (i) 142,800 shares of 8% Preferred Stock directly held by Elyssa
      Dickstein, Mark Dickstein's wife, and (ii) 51,000 shares of 8%
      Preferred Stock directly held by Elyssa Dickstein, Jefferey Schwarz and
      Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor (the
      "Dickstein Trust"), a New York trust established by Mark Dickstein, as
      Grantor, for the benefit of his children. Mark Dickstein has no
      beneficial interest in the Dickstein Trust.

                                      42

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

    (b) Except for the 2,112,440 shares over which The Chase Manhattan
        Corporation may be deemed to have sole dispositive power (which include
        shares of Common Stock underlying 792,746 shares of 8% Preferred Stock),
        shares over which The Chase Manhattan Corporation may be deemed to have
        shared voting power (which include shares of Common Stock underlying
        12,358,929 shares of 8% Preferred Stock) are beneficially owned by
        parties to the Stockholders' Agreement which are unaffiliated with The
        Chase Manhattan Corporation and it is only by reason of The Chase
        Manhattan Bank's position as a party to the Stockholders' Agreement that
        The Chase Manhattan Corporation may be deemed to possess that shared
        voting power.

 (5)    Morgan Stanley is a party to the Stockholders' Agreement. Except for the
        4,565,821 shares over which Morgan Stanley has shared dispositive power
        (which include shares of Common Stock underlying 2,210,247 shares of 8%
        Preferred Stock), shares over which Morgan Stanley may be deemed to have
        shared voting power (which include shares of Common Stock underlying
        12,358,929 shares of 8% Preferred Stock) are beneficially owned by
        parties to the Stockholders' Agreement which are unaffiliated with
        Morgan Stanley and it is only by reason of Morgan Stanley's position as
        a party to the Stockholders' Agreement that Morgan Stanley may be deemed
        to possess that shared voting power.

 (6)    Whippoorwill may be deemed to be the beneficial owner of these shares
        (which include shares of Common Stock underlying 2,104,952 shares of 8%
        Preferred Stock) because it has discretionary authority with respect to
        the investments of, and acts as agent for, the direct holders of the
        shares. Whippoorwill disclaims any beneficial ownership of Common Stock
        or 8% Preferred Stock except to the extent of Whippoorwill's pecuniary
        interest in that stock, if any. Whippoorwill, as agent of and/or general
        partner for certain institutions and funds, is a party to the
        Stockholders' Agreement. Figures include 73,013 shares of Common Stock
        (which include shares of Common Stock underlying 42,951 shares of 8%
        Preferred Stock) that are not subject to the Stockholders' Agreement.

 (7)    Figures include 16,667 shares of Common Stock subject to stock options
        granted pursuant to the Stock Incentive Plan which are immediately
        exercisable.

 (8)    Figures include 240,000 shares of Common Stock subject to stock options
        granted pursuant to the Stock Incentive Plan which are immediately
        exercisable.

 (9)    Figures include 6,667 shares of Common Stock subject to stock options
        granted pursuant to the Stock Incentive Plan which are immediately
        exercisable. Does not include shares held by various institutions and
        funds with respect to whose investments Whippoorwill has discretionary
        authority and for which Whippoorwill acts as agent. Mr. Greenhaus is the
        president and managing director of Whippoorwill. Mr. Greenhaus disclaims
        beneficial ownership of the shares of Common Stock and 8% Preferred
        Stock owned by discretionary accounts managed by Whippoorwill as set
        forth above except to the extent of his pecuniary interest in that 
        stock, if any.

(10)    Figures include 6,667 shares of Common Stock subject to stock options
        granted pursuant to the Stock Incentive Plan which are immediately
        exercisable.

(11)    Figures include 75,000 shares of Common Stock subject to stock options
        granted pursuant to the Stock Incentive Plan which are immediately
        exercisable.

(12)    Figures include 25,000 shares of Common Stock subject to stock options
        granted pursuant to the Stock Incentive Plan which are immediately
        exercisable.

(13)    Mr. Ahearn is no longer employed by the Company. Figures include 25,000
        shares of Common Stock subject to stock options granted pursuant to the
        Stock Incentive Plan which are immediately exercisable.

(14)    Figures include 678,336 shares of Common Stock subject to stock options
        granted pursuant to the Stock Incentive Plan which are immediately
        exercisable.
 
                                      43
<PAGE>
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
   For a description of certain relationships and related transactions
involving individuals who served during 1998 on the Board's Compensation and
Nominating Committee (or its predecessor), see "Item 11. Executive
Compensation--Compensation Committee Interlocks and Insider Participation."
 
Notes Offering
 
   Morgan Stanley, a beneficial owner of more than 5% of the Company's Common
Stock, acted as a placement agent in the previously described Notes Offering,
which the Company completed on February 25, 1999. The Notes were offered only
(i) to qualified institutional buyers under Rule 144A of the Securities Act and
(ii) outside the United States in compliance with Regulation S. As a placement
agent, Morgan Stanley purchased the Notes from the Company at a discount. The
Company and certain of its subsidiaries, on one hand, and the placement agents
(including Morgan Stanley), on the other hand, agreed to indemnify each other
against certain liabilities in connection with the Notes Offering, including
liabilities under the Securities Act.
 
MEG License Arrangements
 
   In connection with the formation of Toy Biz, Inc., MEG (a holder of more
than 5% of Toy Biz, Inc.'s common stock) granted Toy Biz, Inc. an exclusive,
perpetual and paid-up license to manufacture and distribute a broad range of
toys based upon the Marvel characters and properties in which MEG owned
copyrights, trademarks or trade names (the "Marvel License"). The Marvel
License covered all characters (including the associated copyrights and
trademarks) owned by MEG and disseminated under the Marvel Comics trademark.
The Marvel License restricted MEG, subject to Toy Biz, Inc.'s prior consent,
from manufacturing, using, distributing or advertising the licensed products
and from granting other licenses to use the Marvel characters in connection
with the licensed products. Upon the consummation of the Merger, the Marvel
License became an intercompany agreement.
 
   Toy Biz, Inc. and MEG entered into an exclusive license agreement pursuant
to which MEG used the "Toy Biz" trademark on online services and electronic
networks, including the Internet. The license was limited to Marvel-related
products of Toy Biz, Inc. MEG paid Toy Biz, Inc. $500,000 for such license,
which is no longer in effect.
 
   In 1995 and 1996, Toy Biz, Inc. also distributed certain products through a
wholly-owned subsidiary of MEG engaged in the distribution of products to
certain comic book retailers. During the years ended December 31, 1995 and
1996, Toy Biz, Inc.'s sales to that subsidiary totaled $1,616,000 and
$324,000.
 
MEG Services Agreement
 
   In connection with Toy Biz, Inc.'s initial public offering, Toy Biz, Inc.
and MEG entered into a services agreement (the "Services Agreement") governing
the provision by MEG of services to Toy Biz, Inc. Under the Services
Agreement, upon request by Toy Biz, Inc. and acceptance by MEG, MEG provided
certain management, consulting and administrative services and certain
services purchased from third party providers, including legal and accounting
services. Toy Biz, Inc. was obligated to reimburse MEG for the costs of such
services. The Services Agreement automatically renewed for successive one-year
terms unless terminated upon 120 days' notice. Toy Biz, Inc. accrued for the
account of, or reimbursed MEG for, approximately $262,000 and $141,000 of
services for 1996 and 1997, respectively. The Services Agreement is no longer
in effect.
 
Other Agreements with Affiliates
 
   On March 5, 1999, the Company engaged Morgan Stanley to provide financial
advice and assistance. In exchange for those services, the Company has agreed to
pay Morgan Stanley a fee of $1,750,000.
 
                                      44
<PAGE>
 
   Toy Biz, Inc. was a party to a license agreement entered into in September
1994 with The Coleman Company, Inc., an affiliate, at the time, of Toy Biz,
Inc., pursuant to which Toy Biz, Inc. licensed certain Coleman trademarks. The
license terminated during 1997.
 
   Toy Biz, Inc. was a party to a license agreement entered into in July 1995
with Revlon Consumer Products Corporation, an affiliate, at the time, of Toy
Biz, Inc., pursuant to which Toy Biz, Inc. licensed certain Revlon Consumer
Products Corporation trademarks. The license terminated during 1997.
 
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a)  Documents Filed with this Report
 
    1. Financial Statements
 
       See the accompanying Index to Financial Statements and Financial
       Statement Schedule on page F-1.
 
    2. Financial Statement Schedule
 
       See the accompanying Index to Financial Statements and Financial
       Statement Schedule on page F-1.
 
    3. Exhibits
 
       See the accompanying Exhibit Index appearing on page 46.
 
  (b)  Reports on Form 8-K. During the last quarter of 1998, the Company filed
       the following Current Reports on Form 8-K:
 
    1. Current Report on Form 8-K dated October 1, 1998, reporting Items 5
       and 7.
 
    2. Current Report on Form 8-K dated October 13, 1998, reporting Items 2
       and 7.
 
    3. Current Report on Form 8-K/A dated October 16, 1998, reporting Item 7.
 
    4. Current Report on Form 8-K/A-2 dated November 25, 1998, reporting
       Item 7 and containing the financial statements required by Item 7(a)
       and the pro forma financial information required by Item 7(b) in
       connection with the Company's acquisition of Marvel Entertainment
       Group, Inc.
 
   (c) Exhibits. See the Exhibit Index immediately below.
 
                                      45
<PAGE>
 
 
                                 EXHIBIT INDEX
 
 Exhibit No.
 -----------
     2.1     Fourth Amended Joint Plan of Reorganization for Marvel
             Entertainment Group, Inc. dated July 31, 1998 and filed with the
             United States District Court for the District of Delaware on July
             31, 1998, with attached exhibits. (Incorporated by reference to
             Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated
             October 13, 1998 and filed with the Securities and Exchange
             Commission on October 14, 1998.)
     2.2     Asset Purchase Agreement by and among Fleer Corp., Frank H. Fleer
             Corp. and SkyBox International Inc. and Golden Cycle, LLC, dated
             as of January 29, 1999.
     3.1     Restated Certificate of Incorporation. (Incorporated by reference
             to Exhibit 4.1 of the Registrant's Current Report on Form 8-K
             dated October 13, 1998 and filed with the Securities and Exchange
             Commission on October 14, 1998.)
     3.2     Bylaws (as restated and amended).
     4.1     Article V of the Restated Certificate of Incorporation (see
             Exhibit 3.1, above), defining the rights of holders of Common
             Stock.
     4.2     Article VI of the Restated Certificate of Incorporation (see
             Exhibit 3.1, above), defining the rights of holders of 8%
             Preferred Stock.
     4.3     Indenture, dated as of February 25, 1999, defining the rights of
             holders of 12% senior notes due 2009.
     4.4     Plan Warrant Agreement, dated as of October 1, 1998, between the
             Registrant and American Stock Transfer & Trust Company, as warrant
             agent. (Incorporated by reference to Exhibit 4.2 to the
             Registrant's Current Report on Form 8-K dated October 13, 1998 and
             filed with the Securities and Exchange Commission on October 14,
             1998.)
     4.5     Class A Warrant Agreement, dated as of October 1, 1998, between
             the Registrant and American Stock Transfer & Trust Company, as
             warrant agent. (Incorporated by reference to Exhibit 4.3 to the
             Registrant's Current Report on Form 8-K dated October 13, 1998 and
             filed with the Securities and Exchange Commission on October 14,
             1998.)
     4.6     Class B Warrant Agreement, dated as of October 1, 1998, between
             the Registrant and American Stock Transfer & Trust Company, as
             warrant agent. (Incorporated by reference to Exhibit 4.4 to the
             Registrant's Current Report on Form 8-K dated October 13, 1998 and
             filed with the Securities and Exchange Commission on October 14,
             1998.)
     4.7     Class C Warrant Agreement, dated as of October 1, 1998, between
             the Registrant and American Stock Transfer & Trust Company, as
             warrant agent. (Incorporated by reference to Exhibit 4.5 to the
             Registrant's Current Report on Form 8-K dated October 13, 1998 and
             filed with the Securities and Exchange Commission on October 14,
             1998.)

                                      46
<PAGE>
 
 Exhibit No.
 -----------
    10.1     Stockholders' Agreement, dated as of October 1, 1998, by and among
             the Registrant, Avi Arad, the Dickstein Entities (as defined
             therein), the Perlmutter Entities (as defined therein), The
             Chase Manhattan Bank, Morgan Stanley & Co. Incorporated, and
             Whippoorwill Associates, Incorporated, as agent of and/or general
             partner for certain accounts. (Incorporated by reference to
             Exhibit 99.4 to the Registrant's Current Report on Form 8-K/A
             dated and filed with the Securities and Exchange Commission on
             October 16, 1998.)
    10.2     Stock Purchase Agreement, dated as of October 1, 1998, by and
             among the Registrant and Dickstein & Co., L.P., Dickstein Focus
             Fund L.P., Dickstein International Limited, Elyssa Dickstein,
             Jeffrey Schwarz and Alan Cooper as Trustees U/T/A/D 12/27/88,
             Mark Dickstein, Grantor, Mark Dickstein and Elyssa Dickstein, as
             Trustees of the Mark and Elyssa Dickstein Foundation, Elyssa
             Dickstein, Object Trading Corp., and Whippoorwill Associates,
             Incorporated. (Incorporated by reference to Exhibit 99.3 to the
             Registrant's Current Report on Form 8-K/A dated and filed with the
             Securities and Exchange Commission on October 16, 1998.)
    10.3     Registration Rights Agreement, dated as of October 1, 1998, by
             and among the Registrant, Dickstein & Co., L.P., Dickstein Focus
             Fund L.P., Dickstein International Limited, Elyssa Dickstein,
             Jeffrey Schwarz and Alan Cooper as Trustees U/T/A/D 12/27/88,
             Mark Dickstein, Grantor, Mark Dickstein and Elyssa Dickstein, as
             Trustees of the Mark and Elyssa Dickstein Foundation, Elyssa
             Dickstein, Object Trading Corp., Whippoorwill/Marvel Obligations
             Trust--1997, and Whippoorwill Associates, Incorporated.
             (Incorporated by reference to Exhibit 99.5 to the Registrant's
             Current Report on Form 8-K/A dated and filed with the Securities
             and Exchange Commission on October 16, 1998.)
    10.4     Registration Rights Agreement, dated as of December 8, 1998, by
             and among the Registrant, Marvel Entertainment Group, Inc., Avi
             Arad, Isaac Perlmutter, Isaac Perlmutter T.A., The Laura & Isaac
             Perlmutter Foundation Inc., and Zib Inc.
    10.5     Registration Rights Agreement, dated February 25, 1999, by and
             among the Registrant, certain subsidiaries of the Registrant,
             Morgan Stanley & Co. Incorporated and Warburg Dillon Read LLC.
    10.6     Lease, dated as of July 1, 1986, by and between 387 P.A.S.
             Enterprises and Cadence Industries Corporation (9th Floor).
             (Incorporated by reference to Exhibit 10.7 to the Registration
             Statement of Marvel Entertainment Group, Inc. on Form S-1, File No.
             33-40574, dated May 14, 1991).
    10.7     Lease Modification and Extension Agreement dated as of July 1,
             1991, between 387 P.A.S. Enterprises and the Registrant (9th, 10th,
             11th and 12th Floors). (Incorporated by reference to Exhibit 10.9
             to the Annual Report on Form 10-K of Marvel Entertainment Group,
             Inc. for the fiscal year ended December 31, 1991).
    10.8     Lease, dated December 3, 1993, by and between 200 Fifth Avenue
             Associates and the Registrant. (Incorporated by reference to
             Exhibit 10.4 to the Registrant's Registration Statement on Form
             S-1, File No. 33-87268.)
 
                                       47
<PAGE>
 
 Exhibit No.
 -----------
    10.9     Sublease, dated December 19, 1996, by and between Gruner & Jahr
             USA Publishing and the Registrant. (Incorporated by reference to
             Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for
             the year ended December 31, 1996.)
    10.10    License Agreement, dated March 1, 1993, by and between the
             Registrant and Gerber Products Company as amended by Amendment
             thereto, dated April 5, 1995. (Incorporated by reference to
             Exhibit 10.13 to the Registrant's Registration Statement on Form
             S-1, File No. 33-87268 and Exhibit 10.6 to the Registrant's
             Quarterly Report on Form 10-Q for the quarter ended June 30,
             1995.) (Confidential treatment has been requested for a portion
             of this exhibit.)
    10.11    Master License Agreement, dated as of April 30, 1993, between Avi
             Arad & Associates and the Registrant. (Incorporated by reference
             to Exhibit 10.21 to the Registrant's Registration Statement on
             Form S-1, File No. 33-87268.)
    10.12    Employment Agreement, dated as of January 1, 1998, by and between
             Joseph M. Ahearn and the Registrant.*
    10.13    Amendment to Employment Agreement, dated as of October 14, 1998,
             by and between Joseph M. Ahearn and the Registrant.*
    10.14    Employment Agreement, dated as of September 30, 1998, by and
             between Avi Arad and the Registrant.*
    10.15    Employment Agreement, dated as of November 11, 1998, by and
             between Eric Ellenbogen and the Registrant.*
    10.16    Employment Agreement by and between Alan Fine and the Registrant.
             (Incorporated by reference to Exhibit 10.20 to the Registrant's
             Annual Report on Form 10-K for the year ended December 31,
             1996.)*
    10.17    Employment Agreement, dated as of January 1, 1998, by and between
             David J. Fremed and the Registrant. (Incorporated by reference to
             Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
             the period ended September 30, 1998.)*
    10.18    Employment Letter, dated August 27, 1997, by and between William
             H. Hardie, III and the Registrant.*
    10.19    Amendment to Employment Letter, dated February 4, 1999, by and
             between William H. Hardie, III and the Registrant.*
    10.20    1998 Stock Incentive Plan. (Incorporated by reference to Annex A
             of the Registrant's Information Statement on Schedule 14C, filed
             with the Securities and Exchange Commission on December 30,
             1998.)*
    10.21    Amended and Restated Master Agreement, dated as of November 19,
             1997, by and among the Registrant, certain secured creditors of
             Marvel and certain secured creditors of Panini SpA and Amendments
             1 and 2 thereto. (Incorporated by reference to Exhibit 10.26 of
             the Registrant's Annual Report on Form 10-K for the year ended
             December 31, 1997.)
    10.22    Amended and Restated Proxy and Stock Option Agreement, dated as of
             November 19, 1997, between the Registrant and Avi Arad
             (Incorporated by reference to Exhibit 10.2 to the Registrant's
             Current Report on Form 8-K dated November 24, 1997).
 
                                       48
<PAGE>
 
                                  SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          MARVEL ENTERPRISES, INC.
 
                                                    /s/ Eric Ellenbogen
                                          By: _________________________________
                                               Eric Ellenbogen
                                               President and Chief Executive
                                               Officer
 
                                          Date: March 24, 1999
 
                               POWER OF ATTORNEY
 
   Each person whose signature appears below hereby constitutes and appoints
William H. Hardie, III 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.
 
<TABLE>
<CAPTION>
     Signature                          Title                          Date
     ---------                          -----                          ----
<S>                             <C>                                          <C>
/s/ Eric Ellenbogen                                                          March 24, 1999
________________________        President, Chief Executive Officer and
  Eric Ellenbogen                Director (principal executive officer)
                   
                   
/s/ Robert S. Hull              Senior Vice President and Chief Financial    March 26, 1999
________________________         Officer (principal financial and accounting
  Robert S. Hull                 officer)
                   
                   
/s/ Morton E. Handel            Chairman of the Board of Directors           March 26, 1999
________________________
 Morton E. Handel  
                   
                   
   /s/ Avi Arad                 Director                                     March 24, 1999
________________________
     Avi Arad      
                   
                   
/s/ Mark Dickstein              Director                                     March 25, 1999
________________________
  Mark Dickstein   
                   
                   
</TABLE>
 
                                      50
<PAGE>
 
<TABLE>
<CAPTION>
       Signature                Title                                        Date
       ---------                -----                                        ----
 <S>                            <C>                                          <C>
/s/ Shelley F. Greenhaus        Director                                     March 25, 1999
________________________
Shelley F. Greenhaus      
                   
                   
/s/ James F. Halpin             Director                                     March 24, 1999
________________________       
  James F. Halpin


 /s/ Michael M. Lynton          Director                                     March 25, 1999
________________________
   Michael M. Lynton


  /s/ Lawrence Mittman          Director                                     March 29, 1999
________________________
    Lawrence Mittman


 /s/ Isaac Perlmutter           Director                                     March 24, 1999
________________________
    Isaac Perlmutter


     /s/ Rod Perth              Director                                     March 24, 1999
________________________
       Rod Perth


 /s/ Michael J. Petrick         Director                                     March 26, 1999
________________________
   Michael J. Petrick
</TABLE>
 
                                       51
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
                       AND FINANCIAL STATEMENTS SCHEDULE
 
<TABLE>
<CAPTION>
Marvel Enterprises, Inc. (f/k/a Toy Biz, Inc.)
----------------------------------------------
<S>                                                                       <C>
Report of Independent Auditors...........................................  F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31,
 1998....................................................................  F-3
Consolidated Statements of Operations for the years ended December 31,
 1996, 1997, and 1998....................................................  F-4
Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 1996, 1997, and 1998.......................................  F-5
Consolidated Statements of Cash Flows for the years ended December 31,
 1996, 1997, and 1998....................................................  F-6
Notes to Consolidated Financial Statements...............................  F-7
 
Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts............................ F-30
</TABLE>
 
   All other schedules prescribed by the accounting regulations of the
Commission are not required or are inapplicable and therefore have been
omitted.
 
                                      F-1
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders of Marvel Enterprises, Inc.
 
   We have audited the accompanying consolidated balance sheets of Marvel
Enterprises, Inc. (formerly Toy Biz, Inc.) and subsidiaries (the "Company") as
of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 5, 1999,
except for Note 3, as to which the date is February 11, 1999, which report
contained an explanatory paragraph regarding the Company's ability to continue
as a going concern, the Company, as discussed in Note 1, has completed the
issuance of a $250 million notes offering and repaid all outstanding balances
under its Bridge Loan. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no longer exist.
 
   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Marvel
Enterprises, Inc. and subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
 
                                                          /s/ Ernst & Young LLP
 
New York, New York
February 5, 1999, except for Note 3, as to which the date is February 11, 1999
and Notes 1 and 5, as to which the date is February 25, 1999
 
                                      F-2
<PAGE>
 
                            MARVEL ENTERPRISES, INC.
 
                            (formerly Toy Biz, Inc.)
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                           December 31,       December 31,
                                               1997               1998
                                         ----------------   ----------------
                                         (in thousands, except share data)
<S>                                      <C>                <C>
ASSETS
Current assets:
 Cash and cash equivalents..............   $          7,596   $         43,691
 Accounts receivable, net (Note 4)......             50,395             50,312
 Inventories, net (Note 4)..............             22,685             32,598
 Assets held for resale (Note 3)........              4,136             26,000
 Income tax receivable (Note 10)........             17,542              7,396
 Deferred income taxes, net (Note 10)...              8,034                538
 Deferred financing costs...............                --               8,281
 Prepaid expenses and other.............              6,584              3,768
                                           ----------------   ----------------
   Total current assets.................            116,972            172,584
Molds, tools and equipment, net (Note
 4).....................................             17,013             15,548
Product and package design costs, net
 (Note 4)...............................              7,616              5,909
Goodwill and other intangibles, net
 (Note 4)...............................              9,305            487,731
Other assets............................                --               5,053
Deferred income taxes, net (Note 10)....                --               3,079
                                           ----------------   ----------------
   Total assets.........................   $        150,906   $        689,904
                                           ================   ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable.......................   $          5,354   $          7,294
 Accrued expenses and other (Notes 4 and
  10)...................................             25,571             70,672
 Borrowings (Note 5)....................             12,000            200,000
 Administrative claims payable (Note
  13)...................................                --              19,914
 Unsecured creditors payable (Note 1)...                --               8,096
                                           ----------------   ----------------
   Total current liabilities............             42,925            305,976
                                           ----------------   ----------------
Panini liability (Note 1)...............                --              27,000
Deferred income taxes (Note 10) ........                --                 924
                                           ----------------   ----------------
   Total liabilities....................             42,925            333,900
                                           ----------------   ----------------
Commitments and contingencies (Note 13)
8% cumulative convertible exchangable
 preferred stock, $.01 par value,
 75,000,000 shares authorized,
 17,238,000 issued and outstanding,
 liquidation preference $10 per share as
 of December 31, 1998 ..................                --             172,380
                                           ----------------   ----------------
Stockholders' equity (Note 6)
Preferred stock, $.01 par value,
 25,000,000 shares authorized, none
 issued.................................                --                 --
Common stock, $.01 par value,
 100,000,000 shares authorized,
 27,746,127 issued and outstanding at
 December 31, 1997 and 250,000,000
 shares authorized, 40,846,127 issued
 and 33,452,127 outstanding as of
 December 31, 1998......................                277                408
Additional paid-in capital..............             70,578            215,035
Retained earnings.......................             37,126              1,136
                                           ----------------   ----------------
   Total stockholders' equity before
    treasury stock......................            107,981            216,579
Treasury stock, 7,394,000 shares........                --             (32,955)
                                           ----------------   ----------------
   Total stockholders' equity ..........            107,981            183,624
                                           ----------------   ----------------
   Total liabilities, redeemable
    convertible preferred stock and
    stockholders' equity ...............   $        150,906   $        689,904
                                           ================   ================
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                      F-3
<PAGE>
 
                            MARVEL ENTERPRISES, INC.
 
                            (formerly Toy Biz, Inc.)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                                 -----------------------------
                                                   1996      1997       1998
                                                 --------  ---------  --------
                                                  (in thousands, except per
                                                         share data)
<S>                                              <C>       <C>        <C>
Net sales......................................  $221,624  $ 150,812  $232,076
Cost of sales..................................   116,455    106,951   127,978
                                                 --------  ---------  --------
Gross profit...................................   105,169     43,861   104,098
Operating expenses:
  Selling, general and administrative..........    61,876     72,081    97,135
  Depreciation and amortization................    15,674     20,548    19,332
  Amortization of goodwill and other
   intangibles.................................       404        520     7,091
                                                 --------  ---------  --------
    Total expenses.............................    77,954     93,149   123,558
                                                 --------  ---------  --------
Operating income (loss)........................    27,215    (49,288)  (19,460)
Interest expense...............................      (112)      (776)   (9,440)
Other income (expense), net....................       708        414       676
                                                 --------  ---------  --------
  Income (loss) before income taxes............    27,811    (49,650)  (28,224)
  Income tax expense (benefit) (Note 10).......    11,124    (20,185)    4,386
                                                 --------  ---------  --------
    Net income (loss)..........................  $ 16,687  $ (29,465) $(32,610)
                                                 --------  ---------  --------
Less: preferred dividend requirement...........       105         71     3,380
                                                 --------  ---------  --------
  Net income (loss) attributable to Common
   Stock.......................................  $ 16,582  $ (29,536) $(35,990)
                                                 ========  =========  ========
Basic and diluted net income (loss) per common
 share.........................................  $   0.61  $   (1.06) $  (1.23)
Weighted average number of common and common
 equivalent shares outstanding (in thousands)..    27,366     27,746    29,173
</TABLE>
 
 
                See Notes to Consolidated Financial Statements.
 
                                      F-4
<PAGE>
 
                            MARVEL ENTERPRISES, INC.
 
                            (formerly Toy Biz, Inc.)
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                         Common Stock
                         --------------
                                        Additional
                                         Paid-In   Retained  Treasury
                         Shares  Amount  Capital   Earnings   Stock     Total
                         ------  ------ ---------- --------  --------  --------
                                       (in thousands)
<S>                      <C>     <C>    <C>        <C>       <C>       <C>
Balance at December 31,
 1995................... 27,020   $270   $ 61,158  $ 49,904       --   $111,332
Proceeds from secondary
 offering...............    700      7      9,096       --        --      9,103
Exercise of stock op-
 tions..................     23    --         438       --        --        438
Accretion of redeemable
 preferred stock........    --     --        (105)      --        --       (105)
Net income for 1996.....    --     --         --     16,687       --     16,687
                         ------   ----   --------  --------  --------  --------
Balance at December 31,
 1996................... 27,743    277     70,587    66,591       --    137,455
Exercise of stock op-
 tions..................      3    --          62       --        --         62
Accretion of redeemable
 preferred stock........    --     --         (71)      --        --        (71)
Net loss for 1997.......    --     --         --    (29,465)      --    (29,465)
                         ------   ----   --------  --------  --------  --------
Balance at December 31,
 1997................... 27,746    277     70,578    37,126       --    107,981
Capital contribution
 (Note 1)...............    --     --       1,500       --        --      1,500
Capital transactions in
 connection with
 Acquisition--Note 1:
  Issuance of common
   stock................ 13,100    131    125,957       --        --    126,088
  Valuation of
   warrants.............    --     --      17,000       --        --     17,000
  Acquisition of
   treasury stock....... (7,394)   --         --        --    (32,955)  (32,955)
Preferred dividend de-
 clared.................    --     --         --     (3,380)      --     (3,380)
Net loss for 1998.......    --     --         --    (32,610)      --    (32,610)
                         ------   ----   --------  --------  --------  --------
Balance at December 31,
 1998................... 33,452   $408   $215,035  $  1,136  $(32,955) $183,624
                         ======   ====   ========  ========  ========  ========
</TABLE>
 
 
 
                See Notes to Consolidated Financial Statements.
 
                                      F-5
<PAGE>
 
                            MARVEL ENTERPRISES, INC.
 
                            (formerly Toy Biz, Inc.)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                                 -----------------------------
                                                   1996      1997      1998
                                                 --------  --------  ---------
                                                       (in thousands)
<S>                                              <C>       <C>       <C>
Net income (loss)............................... $ 16,687  $(29,465) $ (32,610)
Adjustments to reconcile net income (loss) to
 net cash provided by (used in) operating
 activities:
  Depreciation and amortization.................   16,078    21,068     26,423
  Deferred financing charges....................      --        --       2,596
  Deferred income taxes.........................   (2,032)   (1,321)     7,494
  Changes in operating assets and liabilities:
    Accounts receivable.........................  (20,843)   45,076     13,183
    Inventories.................................   (3,740)   (2,452)    (7,317)
    Income tax receivable.......................      --    (17,542)    10,146
    Prepaid expenses and other..................   (1,591)     (581)     2,953
    Deferred charges and other assets...........      --        --      (4,918)
    Accounts payable, accrued expenses and other
     ...........................................    1,407    (4,883)    24,034
    Administrative claims payable...............   (6,838)    2,851    (12,985)
                                                 --------  --------  ---------
Net cash (used in) provided by operating
 activities.....................................     (872)   12,751     28,999
                                                 --------  --------  ---------
Cash flow used in investing activities:
  Acquisition of Marvel Entertainment Group,
   Inc., net of cash received (Note 1)..........      --        --    (257,865)
  Purchases of molds, tools and equipment.......  (15,352)  (12,448)   (10,702)
  Expenditures for product and package design
   costs........................................   (8,213)   (5,169)    (4,955)
  Patents.......................................     (283)     (127)    (1,668)
  (Purchase) sale of Colorforms assets..........      --     (4,556)     2,786
                                                 --------  --------  ---------
  Net cash used in investing activities.........  (23,848)  (22,300)  (272,404)
                                                 --------  --------  ---------
Cash flow from financing activities:
  Proceeds from bridge facility.................      --        --     200,000
  Exercise of stock option......................      438        62        --
  Net borrowings (repayments) under credit
   agreement....................................      --     12,000    (12,000)
  Redemption of Preferred Stock.................   (1,440)     (939)       --
  Proceeds from capital contribution............      --        --       1,500
  Proceeds from Preferred Stock offering........      --        --      90,000
  Proceeds from additional public offering......    9,260       --         --
                                                 --------  --------  ---------
  Net cash provided by financing activities.....    8,258    11,123    279,500
                                                 --------  --------  ---------
  Net (decrease) increase in cash and cash
   equivalents..................................  (16,462)    1,574     36,095
  Cash and cash equivalents at beginning of
   year.........................................   22,484     6,022      7,596
                                                 --------  --------  ---------
  Cash and cash equivalents at end of year...... $  6,022  $  7,596  $  43,691
                                                 ========  ========  =========
Supplemental disclosure of cash flow
 information:
  Interest paid during the period............... $    149  $    820    $ 5,302
  Net income taxes paid (recovered) during the
   year.........................................   16,156      (476)   (12,594)
Other non-cash transactions:
  Preferred stock dividends.....................      105        71      3,380
  Issuance of securities in connection with the
   acquisition of Marvel Entertainment Group,
   Inc., and treasury stock
   (Note 1).....................................      --        --     189,133
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                      F-6
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1998
 
1. Description of Business and Basis of Presentation
 
   The Company designs, markets and distributes boys', girls', preschool,
activity and electronic toys based on popular entertainment properties and
consumer brand names. The Company also designs, markets and distributes its
own line of proprietary toys. The Company's toy business is conducted both
domestically and internationally. Through its acquisition of MEG, one of the
world's most prominent character-based entertainment companies with a
proprietary library of over 3,500 characters, the Company has entered the
licensing and comic book publishing businesses domestically and
internationally.
 
   The term the "Company" and the term "Marvel" each refer to Marvel
Enterprises, Inc., and its subsidiaries after the acquisition. The term "MEG"
refers to Marvel Entertainment Group, Inc., and its subsidiaries, prior to the
consummation of the acquisition, and its emergence from bankruptcy and the
term "Toy Biz, Inc." refers to the Company prior to the consummation of the
acquisition.
 
   Toy Biz, Inc. was formed on April 30, 1993 pursuant to a Formation and
Contribution Agreement ("Formation Agreement"), entered into by a predecessor
company to Toy Biz, Inc. (the "Predecessor Company"), Mr. Isaac Perlmutter
(the sole stockholder of the Predecessor Company), MEG and Avi Arad ("Mr.
Arad"). The Predecessor Company had been MEG's largest toy licensee. The
Predecessor Company was incorporated in 1990, pursuant to an asset purchase
agreement with Charan Industries, Inc.
 
   In accordance with the Formation Agreement, the Predecessor Company
contributed all of its and an affiliate's assets ($23,335,000) and certain
specified liabilities ($21,949,000) to Toy Biz, Inc. for 44% of Toy Biz,
Inc.'s capital stock. Such specified liabilities included approximately
$15,363,000 due to Mr. Perlmutter and other affiliated companies of the
Predecessor Company. A portion of the assumed liabilities due to Mr.
Perlmutter was paid in cash ($8,752,000) and the remainder of the assumed
liabilities due to Mr. Perlmutter was converted into a promissory note
($6,611,000). MEG made a capital contribution of $500,000 for 46% of Toy Biz,
Inc.'s capital stock and a loan, in the form of a note, of $8,507,000. In
addition, MEG granted Toy Biz, Inc. an exclusive, perpetual and paid up
license to design and distribute toys based on MEG characters. Pursuant to the
Formation Agreement, in exchange for the contribution to Toy Biz, Inc. of his
interests in certain license agreements with Toy Biz, Inc. and cash, Mr. Arad
received 10% of Toy Biz, Inc.'s capital stock. In addition, Toy Biz, Inc.
granted Mr. Arad the Arad Stock Option (the "Option") to acquire an additional
10% of Toy Biz, Inc.'s capital stock. Mr. Arad also agreed to enter into the
Arad Consulting Agreement and the Master License Agreement.
 
   On October 1, 1998, pursuant to the Fourth Amended Joint Plan of
Reorganization proposed by the senior secured lenders of MEG and Toy Biz, Inc.
(the "Plan"), MEG became a wholly-owned subsidiary of Toy Biz, Inc. Toy Biz,
Inc. also changed its name to Marvel Enterprises, Inc. on that date. The
acquisition of MEG was accounted for using the purchase method of accounting.
The results of the acquired business have been included in the Company's
consolidated results of operations from October 1, 1998. The Plan was
confirmed on July 31, 1998 by the United States District Court for the
District of Delaware, which had been administering the MEG bankruptcy cases,
and was approved by the Company's stockholders at a meeting on September 11,
1998.
 
   In accordance with the Plan, the Toy Biz, Inc. stockholders, other than
MEG, immediately after the Reorganization continued to own approximately 40%
of the outstanding common stock of the Company (assuming the conversion of all
of the shares of 8% Cumulative Convertible Exchangeable Preferred Securities
(the "8% Preferred Stock") issued by the Company pursuant to the Plan but not
assuming the exercise of any warrants issued pursuant to the Plan) and the
senior secured lenders of MEG received (i) approximately $231.8
 
                                      F-7
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
million in cash and (ii) common and 8% Preferred Stock issued by the Company
which (assuming the conversion of all 8% Preferred Stock) represent
approximately 42% of the common stock of the Company. Investors purchased 9.0
million shares of 8% Preferred Stock that, represent approximately 18% of the
common stock of the Company (assuming the conversion of all 8% Preferred
Stock). Under the Plan, holders of allowed unsecured claims of MEG ("Unsecured
Creditors") will receive (i) up to $8.0 million in cash and (ii) between 1.0
million and 1.75 million warrants having a term of four years and entitling
the holders to purchase common stock of the Company at $17.25 per share. The
exact amount of cash and warrants to be distributed to the Unsecured Creditors
will be determined by reference to the aggregate amount of allowed unsecured
claims. In addition, Unsecured Creditors will receive (i) distributions from
any future recovery on certain litigation and (ii) a portion of the
Stockholder Warrants as described below. Finally, the Plan provides that three
other series of warrants (the "Stockholder Warrants") will be distributed to
the Unsecured Creditors, to former holders of shares of MEG common stock, to
holders of certain class securities litigation claims arising in connection
with the purchase and sale of MEG common stock and to LaSalle National Bank.
The Stockholder Warrants consist of (a) three-year warrants to purchase 4.0
million shares of common stock of the Company at $12.00 per share, (b) six-
month warrants to purchase 3.0 million shares of 8% Preferred Stock for $10.65
per share subject to increase based upon the date of issuance of the six-month
warrants and (c) four-year warrants to purchase 7.0 million shares of common
stock of the Company at $18.50 per share. The recipients of the Stockholder
Warrants will also be entitled to receive distributions from any future
recovery on certain litigation. Certain other cash distributions were also
provided for by the Plan in connection with settling certain of the disputes
arising out of MEG's bankruptcy.
 
   In accordance with the Plan, two litigation trusts were formed on the
consummation date of the Plan. Each litigation trust is now the legal owner of
litigation claims that formerly belonged to MEG and its subsidiaries. The
primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to
pursue bankruptcy avoidance claims. The primary purpose of the other trust
(the "MAFCO Litigation Trust") is to pursue certain litigation claims against
Ronald O. Perelman and various related entities and individuals. The Company
has agreed to lend up to $1.1 million to the Avoidance Litigation Trust and up
to $1.0 million to the MAFCO Litigation Trust, in each case on a revolving
basis to fund the trust's professional fees and expenses. Each litigation
trust is obligated to reimburse the Company for all sums advanced, with simple
interest at the rate of 10% per year. Net litigation proceeds of each trust
will be distributed to the trust's beneficiaries only after the trust has,
among other things, paid all sums owed to the Company, released the Company
from any further obligation to make loans to the trust, and established
reserves to satisfy indemnification claims. The Company is entitled to 65.1%
of net litigation proceeds from the Avoidance Litigation Trust. The Company is
not entitled to any net litigation proceeds from the MAFCO Litigation Trust.
 
   The preliminary purchase price of MEG, including related fees and expenses,
net of liabilities assumed, was approximately $446.9 million which included
approximately $257.9 million in cash and the remainder in securities of the
Company as outlined above, net of shares of the Company owned by MEG and
reacquired in these transactions. Goodwill from the acquisition will be
amortized over 20 years.
 
                                      F-8
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
 
   Based on a preliminary allocation of purchase price, the fair value of the
assets and liabilities acquired is summarized below.
 
<TABLE>
<CAPTION>
                                        (in thousands)
             <S>                        <C>
             Current assets............    $ 42,978
             Noncurrent assets.........       4,971
             Goodwill and other
              intangible assets........     483,874
             Current liabilities.......     (57,918)
             Non-current liabilities...     (27,000)
                                           --------
                                           $446,905
                                           ========
</TABLE>
 
   In the preliminary allocation of the purchase price, Fleer/SkyBox
("Fleer"), MEG's subsidiaries engaged in the sale of sports and entertainment
trading cards, is presented as an asset held for sale. In January 1999, the
Company entered into an agreement to sell Fleer for $26.0 million in cash,
subject to post-closing adjustment, and the assumption of certain liabilities.
In addition, the Company does not currently intend to continue operating
Panini S.p.A. ("Panini"), MEG's Italian subsidiary engaged in the children's
activity sticker and adhesive paper business. Panini has a deficit in net
tangible assets of approximately $130.7 million as of December 31, 1998;
however, the Panini deficit in net tangible assets reflected in the
preliminary allocation of the purchase price ($27.0 million) is the maximum
amount of such deficit that the Company has guaranteed under the terms of the
Plan. The $27.0 million liability is presented as a long-term liability on the
Consolidated Balance Sheet as of December 31, 1998. The Company anticipates
disposing of Panini in 1999.
 
   See Note 13 regarding contingencies related to, among other things, claims
by unsecured creditors of MEG and other matters.
 
   Presented below are the unaudited pro forma results of the Company giving
effect to the acquisition of MEG as if it has occurred as of the beginning of
the periods presented:
 
<TABLE>
<CAPTION>
                                                     For the Year Ended
                                                        December 31,
                                               --------------------------------
                                                    1997             1998
                                               ---------------  ---------------
                                               (in millions, except per share)
      <S>                                      <C>              <C>
      Net sales...............................          $220.3           $274.5
      Operating loss..........................           (79.4)           (33.9)
      Net loss................................           (96.1)           (81.0)
      Basic and diluted loss per share........           (3.28)           (2.82)
</TABLE>
 
   The Company consummated the Plan and the Merger by utilizing interim
financing arrangements (the "Bridge Loan"). The Bridge Loan had a repayment
schedule of less than one year, causing a significant working capital
deficiency. In addition, the Company was not in compliance with certain
financial and other covenants of the Bridge Loan agreement. These conditions
raised substantial doubt about the Company's ability to continue as a going
concern. On February 25, 1999, the Company completed the issuance of a $250.0
million notes
 
                                      F-9
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
offering ("Senior Notes") in a private placement exempt from registration
under the Securities Act of 1933, as amended ("the Act"). Net proceeds of
approximately $240 million were used to pay all outstanding balances under the
Bridge Loan and for working capital needs. Therefore, the conditions that
raised substantial doubt about whether the Company would continue as a going
concern no longer exist.
 
2. Summary of Significant Accounting Policies
 
 Principles of Consolidation
 
   The consolidated financial statements include the accounts of the Company
and its subsidiaries, except for Panini and Fleer (see Note 1). Upon
consolidation, all significant intercompany accounts and transactions are
eliminated.
 
 Use of Estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The principal areas of judgement relate to provisions for
returns, other sales allowances and doubtful accounts, the realizability of
inventories, goodwill and other intangible assets, and the impairment reserve
for minimum royalty guarantees and minimum advances, molds, tools and
equipment, and product and package design costs. Actual results could differ
from those estimates.
 
 Cash Equivalents
 
   The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
 
 Inventories
 
   Inventories are valued at the lower of cost (first-in, first-out method) or
market.
 
 Molds, Tools, and Equipment
 
   Molds, tools and equipment are stated at cost less accumulated depreciation
and amortization. The Company owns the molds and tools used in production of
the Company's products by third-party manufacturers. At December 31, 1998,
certain of these costs related to products that were not yet in production or
were not yet being sold by the Company. For financial reporting purposes,
depreciation and amortization is computed by the straight-line method
generally over a three-year period (the estimated selling life of related
products) for molds and tooling costs and over the useful life for furniture
and fixtures and office equipment. On an ongoing basis the Company reviews the
lives and carrying value of molds and tools based on the sales and operating
results of the related products. If the facts and circumstances suggest a
change in useful lives or an impairment in the carrying value, the useful
lives are adjusted and unamortized costs are written off accordingly. Write-
offs, in excess of normal amortization, which are included in depreciation and
amortization on the accompanying Consolidated Statements of Operations for the
years ended December 31, 1996, 1997 and 1998 were approximately $364,000,
$2,174,000 and $1,418,000 respectively.
 
 Product and Package Design Costs
 
   The Company capitalizes costs related to product and package design when
such products are determined to be commercially acceptable. Product design
costs include costs relating to the preparation of precise detailed
 
                                     F-10
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
mechanical drawings and the production of sculptings and other handcrafted
models from which molds and dies are made. Package design costs include costs
relating to art work, modeling and printing separations used in the production
of packaging. At December 31, 1998, certain of these costs related to products
that were not yet in production or were not yet being sold by the Company. For
financial reporting purposes, depreciation and amortization of product and
package design is computed by the straight-line method generally over a three-
year period (the estimated selling life of related products). On an ongoing
basis the Company reviews the useful lives and carrying value of product and
package design costs based on the sales and operating results of the related
products. If the facts and circumstances suggest a change in useful lives or
an impairment in the carrying value, the useful lives are adjusted and
unamortized costs are written off accordingly. Write-offs, in excess of normal
amortization, which are included in depreciation and amortization on the
accompanying Consolidated Statements of Operations, for the years ended
December 31, 1996, 1997 and 1998 were approximately $1,164,000, $1,230,000 and
$1,425,000 respectively.
 
 Goodwill and Other Intangibles
 
   Goodwill and other intangibles are stated at cost less accumulated
amortization. Goodwill is principally amortized over 20 years and other
intangibles are amortized over 3 to 10 years. For the years ended December 31,
1996, 1997 and 1998, amortization of goodwill and other intangibles were
approximately $404,000, $520,000 and $7,091,000, respectively.
 
 Long-Lived Assets
 
   In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of", the Company records impairment losses on
long-lived assets used in operations, including intangible assets, when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets.
 
 Deferred Financing Costs
 
   Deferred financing costs, which are mainly costs associated with the
Company's Bridge Facility, are amortized over the term of the related
agreements.
 
 Research and Development
 
   Research and development ("R&D") costs are charged to operations as
incurred. For the years ended December 31, 1996, 1997 and 1998, R&D expenses
were $5,298,000, $4,599,000 and $4,498,000, respectively.
 
 Revenue Recognition
 
   Sales are recorded upon shipment of merchandise and a provision for future
returns and other sales allowances is established based upon historical
experience and management estimates. In certain cases, sales made on a
returnable basis are recorded net of provisions for estimated returns. These
estimates are revised as necessary to reflect actual experience and market
conditions.
 
   Subscription revenues generally are collected in advance for a one year
subscription and are recognized as income on a pro rata basis over the
subscription period.
 
   Income from distribution fees, licensing and sub-licensing of characters
owned by the Company are recorded in accordance with the distribution
agreement and at the time characters are available to the licensee
 
                                     F-11
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
and collection is reasonably assured. Receivables from licensees due more than
one year beyond the balance sheet date are discounted to their present value.
For the years ended December 31, 1996, 1997 and 1998, toy distribution fees
and sub-licensing revenues were $13,637,000, $3,265,000 and $1,250,000,
respectively.
 
 Advertising Costs
 
   Advertising production costs are expensed when the advertisement is first
run. Media advertising costs are expensed on the projected unit of sales
method during interim periods. For the years ended December 31, 1996, 1997 and
1998, advertising expenses were $25,471,000, $27,910,000 and $31,762,000,
respectively. At December 31, 1997 and 1998, the Company had incurred $420,000
and $469,000, respectively, of prepaid advertising costs, principally related
to production of advertisement that will be first run in fiscal 1998 and 1999,
respectively.
 
 Royalties
 
   Minimum guaranteed royalties, as well as royalties in excess of minimum
guarantees, are expensed based on sales of related products. The realizability
of advanced minimum guarantees paid is evaluated by the Company based on the
projected sales of the related products.
 
 Income Taxes
 
   The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and the tax bases
of assets and liabilities and are measured using tax rates and laws that are
scheduled to be in effect when the differences are scheduled to reverse.
 
   Income tax expense includes U.S. and foreign income taxes, including U.S.
Federal taxes on undistributed earnings of foreign subsidiaries to the extent
that such earnings are planned to be remitted.
 
 Foreign Currency Translation
 
   The financial position and results of operations of the Company's Hong Kong
and Mexican subsidiaries are measured using the U.S. dollar as the functional
currency. Assets and liabilities are translated at the exchange rate in effect
at year end. Income statement accounts and cash flows are translated at the
average rate of exchange prevailing during the period. Translation
adjustments, which were not material, arising from the use of differing
exchange rates are included in the results of operations.
 
 Fair Value of Financial Instruments
 
   The fair value of all debt instruments approximate their carry value due to
their short term maturity and variable interest rates.
 
 Concentration of Risk
 
   A large number of the Company's toy products are manufactured in China,
which subjects the Company to risks of currency exchange fluctuations,
transportation delays and interruptions, and political and economic
disruptions. The Company's ability to obtain products from its Chinese
manufacturers is dependant upon the United States' trade relationship with
China. The "most favored nation" status of China, which is reviewed annually
by the United States government, is a regular topic of political controversy.
The loss of China's "most
 
                                     F-12
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
favored nation" status would increase the cost of importing products from
China significantly, which could have a material adverse effect on the
Company.
 
Marvel distributes its comic books to the direct market through the only major
comic book distributor. Termination of this distribution agreement could
significantly disrupt publishing operations.
 
See Note 8 regarding major toy customers.
 
 
Earnings Per Share
 
   In 1997, the Financial Accounting Standards Board issued Statement No. 128.
Earnings Per Share ("Statement 128"). Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Net income (loss) per common share
is computed by dividing net income (loss), less the amount applicable to
preferred dividends, by the weighted average common shares outstanding during
the period. All income (loss) per share amounts for all periods have been
presented and where appropriate, restated to conform to Statement 128
requirements.
 
Comprehensive Income
 
   In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS 130") Reporting Comprehensive Income. The Company's adoption of
SFAS 130 had no effect on the Company as the Company does not have any
comprehensive income items.
 
Accounting for Derivative Instruments and Hedging Activities
 
   In June 1998, the Financial Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted beginning in fiscal 2000. The statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. Management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
 
3. Assets Held for Resale
 
   Shortly after the acquisition of MEG, the Company concluded that Fleer did
not fit the Company's long-term strategy and the Company decided to dispose of
this operation. On February 11, 1999, the Company sold substantially all of
Fleer's assets for approximately $26.0 million in cash, subject to post-
closing adjustments and assumptions of certain liabilities. $15.0 million of
the proceeds were utilized to repay the Bridge Facility (see Note 5). The
Company remains liable under certain contracts of the Fleer business and have
been indemnified against such liabilities by the purchase of such business.
 
   The Company does not currently intend to continue operating the Panini
business. The Company has recorded a liability equal to its guarantee of
Panini's debt.
 
   On March 25, 1997, the Company acquired all of the assets of Colorforms
Inc. ("Colorforms"). The purchase price was approximately $5.0 million,
excluding fees and expenses, consisting of approximately $2.9 million in cash
paid at the closing and the assumption of approximately $2.1 million of
accounts payable and
 
                                     F-13
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
accrued liabilities at the closing date. The Company utilized cash available
under its Chase Credit Facility (see note 5) to finance the acquisition. The
transaction was accounted for as a purchase. The results of Colorforms are
included in the Company's consolidated financial statements from the date of
acquisition.
 
   During 1997, the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash with a promissory note
representing the remainder of $1.35 million due in August 1998 through May
1999. As of December 31, 1997, assets held for sale are $4.1 million.
 
                                     F-14
<PAGE>
 
                            MARVEL ENTERPRISES, INC.
 
                            (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
 
4. Details of Certain Balance Sheet Accounts
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                              1997      1998
                                                             -------  --------
                                                              (in thousands)
<S>                                                          <C>      <C>
Accounts receivable, net, consists of the following:
 Accounts receivable.......................................  $80,212  $ 75,235
 Less allowances for:
  Doubtful accounts........................................     (430)   (3,608)
  Advertising, markdowns, returns, volume discounts and
   other...................................................  (29,387)  (21,315)
                                                             -------  --------
    Total..................................................  $50,395  $ 50,312
                                                             =======  ========
Inventories, net, consist of the following:
 Toys:
  Finished goods...........................................  $17,518  $ 24,685
  Component parts, raw materials and work-in-process.......    5,167     3,977
                                                             -------  --------
    Total Toys.............................................   22,685    28,662
 Publishing:
  Finished goods...........................................      --        754
  Editorial and raw materials..............................      --      3,182
                                                             -------  --------
    Total publishing.......................................              3,936
                                                             -------  --------
    Total..................................................  $22,685  $ 32,598
                                                             =======  ========
Molds, tools and equipment, net, consists of the following:
 Molds, tools and equipment................................  $26,873  $ 21,465
 Office equipment and other................................    7,539    17,255
 Less accumulated depreciation and amortization............  (17,399)  (23,172)
                                                             -------  --------
    Total..................................................  $17,013  $ 15,548
                                                             =======  ========
Product and package design costs, net, consists of the
 following:
 Product design costs......................................  $11,113  $  8,125
 Package design costs......................................    4,404     3,567
 Less accumulated amortization.............................   (7,901)   (5,783)
                                                             -------  --------
    Total..................................................  $ 7,616  $  5,909
                                                             =======  ========
Goodwill and other intangibles, net, consists of the
 following:
 Goodwill (Note 1).........................................  $ 9,453  $492,424
 Patents and other intangibles.............................      818     3,726
 Less accumulated amortization.............................     (966)   (8,419)
                                                             -------  --------
    Total..................................................  $ 9,305  $487,731
                                                             =======  ========
Accrued expenses and other consists of the following:
 Accrued advertising costs.................................  $11,544  $  8,183
 Accrued royalties.........................................    2,228     9,584
 Inventory purchases.......................................    4,909     7,389
 Deferred financing costs..................................      --      4,000
 Income taxes payable......................................    3,495     4,709
 Deferred income taxes payable.............................      540     2,693
 Litigation Trust accrual..................................      --      2,100
 Other accrued expenses....................................    2,855    32,014
                                                             -------  --------
    Total..................................................  $25,571  $ 70,672
                                                             =======  ========
</TABLE>
 
                                      F-15
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
 
5. Debt Financing
 
   To partially finance the acquisition of MEG, the Company obtained a $200.0
million loan (the "Bridge Facility") from UBS AG, Stamford Branch ("UBS AG").
The Bridge Facility bore interest at either the bank's base rate (defined as
the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds
Rate) plus 5.50% or at the Eurodollar rate plus 6.50%. Both margins increased
by 0.50% on April 30, 1999 and by an additional 0.50% on the last day of each
three-month period thereafter. The Company incurred a commitment fee for the
Bridge Facility upon signing and was required to pay an additional
continuation fee of 2% if the Company had not refinanced the facility on or
prior to April 30, 1999. The Bridge Facility was required to be repaid by
September 27, 1999.
 
   On September 28, 1998, the Company and UBS AG entered an agreement for a
$50.0 million Revolving Credit Facility ("UBS Credit Facility"). The UBS
Credit Facility bore interest at either the bank's base rate (defined as the
higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate)
plus a margin ranging from 0.75% to 1.25% depending on the Company's financial
performance or at the Eurodollar rate plus a margin ranging from 1.75% to
2.25% depending on the Company's financial performance. The UBS Credit
Facility required the Company to pay a commitment fee of 0.50% per annum on
the average daily unused portion of the facility. There were no borrowings
under the UBS Credit Facility. The Company had approximately $1.6 million in
letters of credit outstanding as of December 31, 1998, which reduced the
available amount under the UBS Credit Facility.
 
   The Bridge Facility and the UBS Credit Facility were secured by all of the
Company's assets (other than Panini) and contained various financial
covenants, as well as restrictions on new indebtedness, acquisitions and
similar investments, the sale or transfer of assets, capital expenditures,
restricted payments, payment of dividends, issuing guarantees and creating
liens. In addition, the Company could not pay cash dividends as long as the
Bridge Loan was outstanding. The UBS Credit Facility also required an annual
reduction of outstanding borrowings to zero for a period of at least thirty
consecutive calendar days from October 1, 1998 to December 31, 1999 and during
each fiscal year thereafter.
 
   The Company was not in compliance with certain of the financial and other
covenants of the Bridge Facility and UBS Credit Facility. On February 25,
1999, the Company completed the issuance of a $250.0 million notes ("Senior
Notes") offering in a private placement exempt from registration under the
Act. Net proceeds of approximately $240 million were used to pay all
outstanding balances under the Bridge Loan and for working capital needs. The
$250 million Senior Notes are due June 15, 2009 and bear interest at 12% per
annum. The Senior Notes may be redeemed beginning June 15, 2004 for a
redemption price of 106% of the principal amount, plus accrued interest. The
redemption price decreases 2% each year after 2004 and will be 100% of the
principal amount, plus accrued interest, beginning on June 15, 2007. In
addition, 35% of the Senior Notes may, under certain circumstances, be
redeemed before June 15, 2002 at 112% of the principal amount, plus accrued
interest. Principal and interest on the Senior Notes are guaranteed on a
senior basis jointly and severally by each of the Company's domestic
subsidiaries. The Company will offer to exchange the Senior Notes which are
not registered under the Act for registered notes having substantially the
same terms. If the Company fails to comply with this requirement, the interest
rate on the Senior Notes will increase .5% per annum until such time as the
Senior Notes are generally freely transferable.
 
   In the first quarter of 1999, in connection with the repayment of the
Bridge Facility, the Company will record an extraordinary charge of
approximately $1.8 million for the write-off of Bridge Facility deferred
financing costs.
 
 
                                     F-16
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc).
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
   Prior to October 1, 1998, the Company had a revolving line of credit (the
"Chase Credit Facility") with a syndicate of banks for which The Chase
Manhattan Bank served as administrative agent. The Chase Credit Facility
provided that the Company could borrow an aggregate amount up to $29.0
million, subject to certain borrowing base limitations based upon the level of
the Company's receivables and inventory. This facility was terminated at the
closing of the MEG acquisition and replaced with the UBS Credit Facility.
 
   The interest rate for borrowing as of December 31, 1997 and 1998 was 8.50%
and 12.10%, respectively and the weighted average interest rate for 1997 and
1998 was 8.44% and 11.31%, respectively. The maximum amounts outstanding
during 1997 and 1998 were $12.0 million and $200.0 million, respectively.
 
   The interest expense, including amortization of Bridge Facility commitment
fees and other costs in 1998, for the years ended December 31, 1996, 1997 and
1998 were $112,000, $776,000 and $9,440,000, respectively.
 
6. Stockholders' Equity
 
   On September 11, 1998, the Company's stockholders approved changes in the
Company's capital structure in connection with the approval of the Plan. These
changes eliminated the Class B Common Stock, authorized an additional 150.0
million shares of common stock (for a maximum authorized amount of 250.0
million shares) and authorized 100.0 million shares of preferred stock,
including 75.0 million shares of 8% Preferred Stock and 25.0 million shares of
preferred stock with a $.01 par value.
 
   The 8% Preferred Stock is convertible into 1.039 fully paid and non-
assessable shares of common stock of the Company. The Company is required to
redeem all outstanding shares of the 8% Preferred Stock on October 1, 2011 at
$10.00 per share plus all accrued and unpaid dividends. The 8% Preferred Stock
generally votes together with the common stock on all matters. The Company has
the option to pay the dividend in cash or additional 8% Preferred Stock, but
cannot pay cash dividends on its 8% Preferred Stock as long as the Bridge
Facility is outstanding. On January 4, 1999, the Company issued 338,000 shares
of 8% Preferred Stock in payment of dividends declared and payable to
stockholders of record at December 31, 1998. These shares are shown as
outstanding at December 31, 1998.
 
   The Company issued the following securities in accordance with the Plan:
(a) 7.9 million shares of 8% Preferred Stock to MEG fixed senior secured
lenders, (b) 9.0 million shares of 8% Preferred Stock to new investors at
$10.00 per share, (c) 13.1 million shares of common stock to the MEG fixed
senior secured lenders, (d) four-year warrants to purchase up to 1.75 million
shares of common stock at $17.25 per share, (e) three-year warrants to
purchase 4.0 million shares of common stock at $12.00 per share, (f) six-month
warrants to purchase 3.0 million shares of preferred stock for $10.65 per
share subject to increase based upon the date of issuance of the six-month
warrants, and (g) four-year warrants to purchase 7.0 million shares of common
stock at $18.50 per share. (See Note 1).
 
   The Company has reserved 3.0 million shares of 8% Preferred Stock for
issuance upon exercise of warrants. In addition, the Company has reserved 39.4
million shares of common stock for issuance on conversion of the 8% Preferred
Stock, and exercise of warrants and stock options.
 
   In connection with the Plan, the Company received a $1.5 million capital
contribution from an affiliate of Mr. Perlmutter and Mr. Arad. Mr. Perlmutter
and Mr. Arad received no additional equity for such contribution.
 
                                     F-17
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc).
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
 
7. Stock Option Plans
 
   Under the terms of the Company's 1998 Stock Incentive Plan (the "Stock
Incentive Plan"), incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance units and performance
shares may be granted to officers, employees, consultants and directors of the
Company and its subsidiaries from time to time. In November 1998, the Company
authorized a maximum aggregate number of shares of Common Stock as to which
options and rights may be granted under the Stock Incentive Plan of 6.0
million shares, including options described below. All options granted and
outstanding under the Company's previous stock incentive plan (the "1995 Stock
Option Plan") and all previous stock option plans of MEG were canceled at or
prior to the consummation of the Plan on October 1, 1998.
 
   Information with respect to options under the stock option plans are as
follows:
 
<TABLE>
<CAPTION>
                                                                      Weighted
                                                                      Average
                                                                      Exercise
                                     Shares    Option Price per Share  Price
                                    ---------  ---------------------- --------
<S>                                 <C>        <C>                    <C>
Outstanding at December 31, 1995...   995,602      $15.00-$22.625
Exercised..........................   (22,664)                        $18.000
Canceled...........................   (47,303)                        $18.119
Granted............................   195,250                         $17.111
                                    ---------
Outstanding at December 31, 1996... 1,120,885      $15.00-$22.625
Canceled...........................  (484,666)                        $18.115
Exercised..........................    (3,333)                        $18.000
Granted............................       --                          $   --
                                    ---------
Outstanding at December 31, 1997...   632,886      $15.00-$22.625
Canceled...........................  (632,886)                        $17.916
Exercised..........................       --                              --
Granted (under New Stock Incentive
 Plan)............................. 3,946,000                         $  6.05
                                    ---------
Outstanding at December 31, 1998... 3,946,000      $ 5.875-$ 6.25
                                    =========
</TABLE>
 
   Options granted under the Stock Incentive Plan vest generally in four equal
installments beginning with the date of grant. Of the outstanding options at
December 31, 1998, options for 1,004,000 shares became exercisable on January
20, 1999 and 2,054,000 shares were available for future grants of options and
rights. At December 31, 1998, the weighted average remaining contractual life
of the options outstanding is 9.92 years.
 
   The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related Interpretations. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on date of grant, no compensation expense is recognized. In 1996, the
Company elected to follow the disclosure-only provisions under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," ("FAS 123"). For the
purposes of FAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
 
<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                        --------------------------------------
                                           1996         1997          1998
                                        ------------------------  ------------
                                        (in thousands, except per share data)
<S>                                     <C>         <C>           <C>
Net income (loss), as reported......... $    16,687 $    (29,465) $    (32,610)
Pro forma net income (loss)............      15,195      (29,816)      (35,679)
Pro forma net income (loss) per share
 attributable to Common Stock--basic
 and diluted........................... $      0.55 $      (1.08) $      (1.34)
                                        =========== ============  ============
</TABLE>
 
 
                                     F-18
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc).
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
   The fair value for each option grant under the stock option plans was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the various grants made during
1995 and 1996: risk free interest rates ranging from 5.26% to 7.19%; no
dividend yield; expected volatility of .354; and expected lives of three years
to five years. The weighted average assumptions for the 1998 grants are: 6.0%
interest rate; no dividend yield; expected volatility of .567; and expected
life of 3 years. The option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the option valuation model requires
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock
options have characteristics significantly different from those traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate in management's opinion, the
existing model does not necessarily provide a reliable single measure of the
fair value of its employee stock options.
 
   The effects of applying FAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported net income in future
years.
 
8. Sales to Major Customers and International Operations
 
   The Company primarily sells its merchandise to major retailers, principally
throughout the United States. Credit is extended based on an evaluation of the
customer's financial condition, and, generally, collateral is not required.
Credit losses are provided for in the financial statements and consistently
were within management's expectation. In 1996 and 1997, the Marvel bankruptcy
and concerns among retailers about the future of the Marvel brand caused
customers to claim higher than expected return and other sales allowances.
 
   During the year ended December 31, 1996, two customers accounted for
approximately 23% and 18% of total net sales. During the year ended December
31, 1997, three customers accounted for approximately 22%, 15% and 12% of
total net sales. During the year ended December 31, 1998, three customers
accounted for approximately 23%, 15% and 10% of total net toy sales.
 
   The Company's Hong Kong subsidiary supervises the manufacturing of the
Company's products in China and sells such products internationally. All sales
by the Company's Hong Kong subsidiary are made F.O.B. Hong Kong against
letters of credit. During the years ended December 31, 1996, 1997 and 1998,
international sales were approximately 20%, 22%, and 15%, respectively, of
total net sales. During the years ended December 31, 1996, 1997 and 1998, the
Hong Kong operations reported operating income of approximately $18,880,000,
$5,868,000 and $4,224,000 and income before income taxes of $19,079,000,
$6,102,000 and $4,574,000, respectively. At December 31, 1997 and 1998, the
Company had assets in Hong Kong of approximately $28,660,000 and $29,966,000,
respectively. The Hong Kong subsidiary represented $26,670,000 and
$30,489,000, respectively, of the Company's consolidated retained earnings
during the years ended December 31, 1997 and 1998.
 
9. Restructuring and Other Unusual Costs
 
   In connection with the consummation of the Plan (See Note 1), the Company
reviewed its relationships with its foreign distributors, as well as the
Company's relationship with certain suppliers, for business conflicts. As part
of integrating MEG's operations with those of the Company, the Company plans
on rationalizing its international licensing and product distribution
relationships. In addition, certain products that were at various stages of
design and marketing are being discontinued and written-off because of
business conflicts that arose out of the acquisition of MEG.
 
 
                                     F-19
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc).
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
 
   As a result of the above matters, the Company has recorded allowances and
unusual charges of approximately $16.8 million for the year ended December 31,
1998, which relate to impairment of assets, severance costs and the settlement
of litigation that arose in prior years regarding a licensing agreement. These
costs are reflected in the following captions in the statement of operations.
 
                     (in thousands)
   Net sales
    (allowances)...  $        2,925
   Cost of sales...           1,193
   Selling general
    and
    administrative..         11,676
   Depreciation and
    amortization...           1,032
                     --------------
                     $       16,826
                     ==============
   Cash charges....  $        3,400
   Non-cash
    charges........  $       13,426
                     --------------
                     $       16,826
                     ==============
 
   Of these costs, approximately $14.9 million and $1.9 million were charged
to the third and fourth quarters, respectively, of fiscal 1998. At December
31, 1998, $1.4 million of the cash charges remain unpaid. The Company expects
to pay the remaining cash charges under contractual obligations extending to
2000.
 
10. Income Taxes
 
   The provision (benefit) for income taxes is summarized as follows:
 
<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                    --------------------------
                                                     1996      1997     1998
                                                    -------  --------  -------
                                                         (in thousands)
<S>                                                 <C>      <C>       <C>
Current:
  Federal.......................................... $ 8,474  $(19,196) $(6,189)
  State............................................   1,943      (191)     410
  Foreign..........................................   2,739       523      824
                                                    -------  --------  -------
                                                    $13,156  $(18,864) $(4,955)
Deferred:
  Federal.......................................... $(1,586) $  1,287  $ 6,025
  State............................................    (446)   (2,608)   3,316
                                                    -------  --------  -------
                                                     (2,032)   (1,321)   9,341
                                                    -------  --------  -------
Income tax expense (benefit) ...................... $11,124  $(20,185) $ 4,386
                                                    =======  ========  =======
</TABLE>
 
                                     F-20
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
 
   The differences between statutory Federal income tax rate and the effective
tax rate are attributable to the following:
 
<TABLE>
<CAPTION>
                                                            Years Ended
                                                           December 31,
                                                         --------------------
                                                         1996  1997     1998
                                                         ----  -----   ------
<S>                                                      <C>   <C>     <C>
Federal income tax provision computed at the statutory
 rate................................................... 35.0% (35.0)% (35.0%)
State taxes, net of Federal income tax effect...........  5.0%  (5.7)%  (4.7%)
Non-deductible amortization expense.....................   --     --     7.9%
Increase in valuation allowance.........................   --     --    48.6%
Other...................................................   --     --    (1.3%)
                                                         ----  -----   ------
Total provision for income taxes........................ 40.0% (40.7)%  15.5%
                                                         ====  =====   ======
</TABLE>
 
   For financial statement purposes, the Company records income taxes in
accordance with FAS109 using a liability approach for financial accounting and
reporting which results in the recognition and measurement of deferred tax
assets based on the likelihood of realization of tax benefits in future years.
Deferred taxes result from temporary differences in the recognition of income
and expenses for financial and income tax reporting purposes and differences
between the fair value assets acquired in business combinations accounted for
as purchases and their tax bases. The approximate effect of temporary
differences that gave rise to deferred tax balances were as follows:
 
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  1997   1998
                                                                 ------ -------
                                                                 (in thousands)
     <S>                                                         <C>    <C>
     Deferred tax assets:
       Accounts receivable ..................................... $1,762 $ 4,573
       Inventory................................................  2,447   6,623
       Sales returns reserves...................................    955   4,505
       Employment reserves......................................   (80)   3,999
       Restructuring reserves...................................    --      589
       Reserve related to foreign investments...................    --    2,373
       Other reserves...........................................    --    1,038
       Net operating loss carryforwards.........................  2,820  26,847
       Tax credit carryforwards.................................    --      657
       Other....................................................    130   3,759
                                                                 ------ -------
       Total gross deferred tax assets..........................  8,034  54,963
       Less valuation allowance.................................    --  (51,346)
                                                                 ------ -------
       Net deferred tax assets..................................  8,034   3,617
                                                                 ------ -------
     Deferred tax liabilities:
       Depreciation/amortization ...............................    540     636
       Licensing, net...........................................    --    2,981
                                                                 ------ -------
       Total gross deferred tax liabilities.....................    540   3,617
                                                                 ------ -------
     Net deferred tax asset (liability)......................... $7,494 $   --
                                                                 ====== =======
</TABLE>
 
 
                                     F-21
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
   During 1998, the Company recorded a valuation allowance against its
deferred tax assets as it was not assured that such assets would be realized
in the future. The total valuation allowance for 1998 includes $38,141,000
which, if realized, will be accounted for as a reduction of goodwill.
 
   At December 31, 1998, the Company expects to have a Federal net operating
loss carryforward of approximately $40,000,000. This loss carryforward will
expire in years 2008 through 2018. This $40,000,000 loss is subject to the
separate return years limitation (commonly referred to as "SRLY") and a
Section 382 limitation. Any loss realized will be accounted for as a reduction
of goodwill. Additionally, the Company expects to have a state and local net
operating loss carryforward of approximately $103,000,000. The state and local
loss carryforward will expire in various jurisdictions in years 1999 through
2018. This loss carryforward is generally subject to the Section 382
limitation but not the SRLY limitation. Benefit was not provided for either
the Federal or state and local net operating loss carryforwards at December
31, 1998.
 
11. Quarterly Financial Data (unaudited)
 
   Summarized quarterly financial information for the years ended December 31,
1997 and 1998 is as follows:
 
<TABLE>
<CAPTION>
                                           1997                                       1998
                         ------------------------------------------ -----------------------------------------
     Quarter Ended       March 31 June 30  September 30 December 31 March 31 June 30 September 30 December 31
     -------------       -------- -------  ------------ ----------- -------- ------- ------------ -----------
                                                (in thousands, except per share data)
<S>                      <C>      <C>      <C>          <C>         <C>      <C>     <C>          <C>
Net sales............... $34,414  $34,452    $ 40,765    $ 41,181   $42,641  $48,675   $ 65,045    $ 75,715
Gross profit............  14,513   12,195      10,245       6,908    19,408   22,895     26,300      35,495
Operating income
 (loss).................     765   (8,676)    (18,505)    (22,872)    1,882    3,607    (11,969)    (12,980)
Net income (loss).......     475   (5,266)    (11,219)    (13,455)    1,076    2,106     (7,223)    (28,569)
Preferred divided
 requirement............      23       24          24         --        --       --         --        3,380
Basic and dilutive net
 income (loss) per
 common share........... $  0.02  $ (0.19)   $  (0.41)   $  (0.48)  $  0.04  $  0.08   ($  0.26)   $  (0.96)
</TABLE>
 
   The income (loss) per common share computation for each quarter and the
year are separate calculations. Accordingly, the sum of the quarterly income
(loss) per common share amounts may not equal the income (loss) per common
share for the year.
 
   The fourth quarter of 1997 includes pretax adjustments of $7,762,000
related to year end adjustments which were not previously estimable. The
Company believes most of these adjustments relate to the MEG bankruptcy and
concerns among retailers about the future of the Marvel brand. See Note 9 for
unusual charges in the third and fourth quarters of 1998.
 
12. Related Party Transactions
 
   Mr. Perlmutter indirectly purchased approximately $34.9 million of the 8%
Preferred Stock in connection with the Plan. See Note 1.
 
   Prior to the Company's acquisition of MEG on October 1, 1998 (see Note 1),
MEG provided support to the Company relating to licensing agreements,
promotion, legal and financial matters. The cost for these support services
has been included in selling, general and administrative expenses, and
amounted to $262,000 and $141,000 for the years ended December 31, 1996 and
1997. The Company did not receive any services from MEG in 1998. At December
31, 1997, the Company had a receivable from MEG of $94,000.
 
   The Company entered into an exclusive license agreement pursuant to which
MEG could use the Toy Biz trademark on online services and electronic
networks, including the Internet. The license was limited to Marvel-
 
                                     F-22
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
related products of the Company. MEG paid the Company $500,000 in 1996 for
such license. The Company sold merchandise totaling $324,000 to a subsidiary
of MEG during the year ended December 31, 1996. Related receivables of
$207,000 at December 31, 1996 were subsequently collected.
 
   An affiliate of the Company, which is wholly-owned by Mr. Perlmutter, acts
as the Company's media consultant in placing the Company's advertising and, in
connection therewith, receives certain fees and commissions based on the cost
of the placement of such advertising. During the years ended December 31,
1996, 1997 and 1998, the Company paid fees and commissions to the affiliate
totaling approximately $965,000, $1,274,000 and $1,147,000, respectively,
relating to such advertisements.
 
   The Company accrued royalties to Mr. Arad for toys he invented or designed
of $1,848,000, $3,624,000 and $4,254,000 during the years ended December 31,
1996, 1997 and 1998, respectively. At December 31, 1996, the Company had a
receivable from Mr. Arad for $505,000 related to reimbursement of expenses
which was subsequently collected. At December 31, 1997 and 1998, the Company
had an accrual to Mr. Arad of $197,000 and $396,000, respectively, for unpaid
royalties.
 
   The Company shares office space and certain general and administrative
costs with affiliated entities. Rent received from affiliates for the years
ended December 31, 1996, 1997 and 1998 was $109,000, $116,000 and $105,000,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.
 
13. Commitments and Contingencies
 
   Leases: The Company is a party to various noncancellable operating leases
involving office and warehouse space expiring on various dates from November
18, 1999 through April 30, 2004. The leases are subject to escalations based
on cost of living adjustments and tax allocations. Minimum future obligations
on these leases are as follows:
 
<TABLE>
<CAPTION>
                                                                  (in thousands)
   <S>                                                            <C>
   1999..........................................................    $ 2,530
   2000..........................................................      2,284
   2001..........................................................      1,218
   2002..........................................................        283
   2003..........................................................        151
   Thereafter....................................................         50
                                                                     -------
                                                                     $ 6,516
                                                                     =======
</TABLE>
 
   Rent expense amounted to approximately $788,000, $1,220,000, and $1,060,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
 
   The Company is a party to various royalty agreements with future guaranteed
royalty payments through 2001. Such minimum future obligations are as follows:
 
<TABLE>
<CAPTION>
                                                                  (in thousands)
   <S>                                                            <C>
   1999..........................................................     $1,822
   2000..........................................................      1,570
   2001..........................................................      1,190
                                                                      ------
                                                                      $4,582
                                                                      ======
</TABLE>
 
 
                                     F-23
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
   The Company has recorded approximately $8,124,000 as a net receivable for
minimum guaranteed royalties as of December 31, 1998. The portion receivable
after one year from the balance sheet date is included in other assets. The
minimum guaranteed royalties receivable are due as follows:
 
<TABLE>
<CAPTION>
                                                                  (in thousands)
   <S>                                                            <C>
   1999..........................................................    $ 5,660
   2000..........................................................      2,670
   2001..........................................................        609
   2002 and thereafter...........................................      3,500
   Allowances and discounting....................................     (4,315)
                                                                     -------
                                                                     $ 8,124
                                                                     =======
</TABLE>
 
Legal Matters
 
   The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and
claims incident to the normal conduct of its business. Although it is
impossible to predict the outcome of any outstanding legal proceeding and
there can be no assurances, the Company believes that its legal proceedings
and claims (including those described below), individually and in the
aggregate, are not likely to have a material adverse effect on its financial
condition, results of operations or cash flows.
 
   Certain Bankruptcy Proceedings. As a result of the consummation of the Plan
on October 1, 1998, all claims against MEG with respect to orders issued by
the District Court in connection with the Plan have been released, as have all
claims by MEG against the Company and all claims against the Company
concerning the effect of the June 1997 change of control of MEG on the voting
power of the stock in the Company owned by MEG.
 
   Spider-Man Litigation. The Company's subsidiaries, Marvel Entertainment
Group, Inc. and Marvel Characters, Inc. (collectively, the "Marvel Parties"),
are parties to a consolidated case pending in the Superior Court of the State
of California for the County of Los Angeles to which Metro-Goldwyn-Mayer
Studios Inc. and two of its affiliates ("MGM"), Columbia Tristar Home Video
and related entities ("Sony"), Viacom International Inc. ("Viacom"), Menahem
Golan and others are also parties. Insofar as the Marvel Parties are
concerned, the litigation involves, on one hand, claims by each of MGM, Sony
and Viacom of rights to produce or to distribute in certain media a feature
length, live action motion picture based upon the Marvel Parties' Spider-Man
character and on the other hand, the Marvel Parties' assertion that none of
these parties has any such rights. In addition to declaratory relief and other
equitable relief with respect to the right to produce or distribute a live
action Spider-Man movie, the Marvel Parties and their adversaries have
asserted unliquidated damage claims against one another on a variety of legal
theories. The rights being asserted by MGM, Sony and Viacom are alleged to
arise under a series of agreements, the first of which dates back to 1985,
under which certain rights to produce and distribute a Spider-Man movie were
granted by the Marvel Parties. Each of these agreements contemplated the
production or distribution of a Spider-Man movie before a specified date after
which the granted rights terminated or reverted to the Marvel Parties. The
Marvel Parties contend that all rights granted under these agreements have
expired or been terminated by agreement or that the claims asserted are barred
for a variety of other reasons. On February 3, 1999, the court granted the
Marvel Parties' motion for summary judgment dismissing certain of MGM's
claims. Additional motions by the Marvel Parties for summary judgment
dismissing other MGM claims and certain Viacom claims are scheduled for
hearing in late February 1999. A trial is currently scheduled to begin in
March 1999. The Spider-Man motion picture rights at issue in
 
                                     F-24
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
the California consolidated case are also the subject of an adversary
proceeding commenced by the chapter 11 trustee of the Marvel Parties in the
District Court for a declaratory judgment that the Marvel Parties are the sole
owners of the unencumbered right to produce and distribute a Spider-Man movie.
The adversary proceeding was stayed by the District Court in August 1998,
subject to the right of the Marvel Parties to apply to lift the stay if the
California case is not adjudicated promptly. Although there can be no
assurances, the Company believes that it will ultimately be successful in
establishing its rights with respect to a Spider-Man movie and intends to
litigate its claims vigorously.
 
   Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A.
Wolfman commenced an action in the United States District Court for the
Central District of California against New Line Cinema Corporation, Time
Warner Companies, Inc., the Company, MEG and its wholly-owned subsidiary,
Marvel Characters, Inc., and others. The complaint alleges that the motion
picture Blade, produced and distributed by New Line pursuant to an agreement
with MEG, as well as the Company's sale of action figure toys, infringes
Wolfman's claimed copyrights and trademarks as the author of the original
stories featuring the Blade and Deacon Frost characters (collectively, the
"Work") and that Wolfman created the Work as an independent contractor engaged
by MEG and granted MEG only the non-exclusive right to publish the Work in
print for MEG's Tomb of Dracula series and that Wolfman had relied upon MEG to
apply for registration of copyrights covering the Work in Wolfman's name. The
complaint also charges the defendants in the action with unfair competition
and other tortious conduct based upon Wolfman's asserted rights in the Work.
The relief sought by the complaint includes a declaration that the defendants
have infringed Wolfman's copyrights, compensatory and punitive damages, an
injunction and various other forms of equitable relief. Although there can be
no assurances, the Company believes that each and every component of the Work
was created for MEG as a "work for hire" within the meaning of the applicable
copyright statute and believes that all of Wolfman's claims are without merit
and intends to defend the action vigorously if the action is allowed to
proceed.
 
     In August 1998, MEG responded to the filing of Wolfman's California
complaint by filing a motion in the District Court for an order imposing
monetary sanctions against Wolfman for violating the automatic stay of actions
against debtors or their property imposed under the bankruptcy laws. Shortly
thereafter, Wolfman voluntarily dismissed the complaint against MEG, Marvel
Characters, Inc., Marvel Studios and Marvel Comics and agreed in writing not
to take any further action with respect to the California action without leave
of the District Court. On October 30, 1998, Wolfman filed a motion in the
District Court seeking leave to prosecute his claims in the California action,
which motion was denied on January 7, 1999.
 
     Prior to commencing his action in California, on January 24, 1997,
Wolfman filed a proof of claim in the bankruptcy cases of MEG and Marvel
Characters, Inc., asserting ownership rights to the Blade and Deacon Frost
characters, among others. The Company intends to object vigorously to this
claim and to seek a declaration that Marvel Characters, Inc. (which is now a
wholly-owned subsidiary of the Company), not Wolfman, is the lawful owner of
the rights claimed by Wolfman.
 
     Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. While the amounts claimed are material
to the Company's financial position, the Company believes that the ultimate
resolution of these matters will not be material to the Company's financial
condition, results of operations or cash flows, although there can be no
assurances.
 
14. Benefits Plans
 
   The Company has a 401(k) Plan for its employees. In addition, in connection
with the sale of Fleer (see Note 3), the Company retained certain liabilities
related to a noncontributory defined benefit pension plan for
 
                                     F-25
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
salaried employees. In prior years, this plan was amended to prohibit
participation by new participants. The accumulated benefit obligation is
approximately $18.9 million. The funded value of plan assets is approximately
$15.9 million and the pension liability at December 31, 1998 is approximately
$3.0 million. Plan expenses for the years ended December 31, 1996, 1997, and
1998 were not significant.
 
15. Segment Information
 
   Following the Company's acquisition of MEG (see Note 1), the Company
realigned its businesses into three segments: Toy Merchandising and
Distributing, Publishing and Licensing Segments.
 
 Toy Merchandising and Distributing Segment
 
   The toy merchandising and distributing segment designs, develops, markets
and distributes both innovative and traditional toys in the United States and
internationally. The Company's toy products fall into three categories: toys
based on its characters, proprietary toys designed and developed by the
Company, and toys based on properties licensed to the Company by third
parties. This segment derives revenues from products based on characters
licensed from the licensing segment. In addition, the Company has diversified
its product line by developing a proprietary line of toys, as well as by
developing toys under licensing agreements with non-affiliated licensors.
 
 Publishing Segment
 
   The Company acquired its publishing segment of operations on October 1,
1998 (see Note 1).
 
   The publishing segment is a creator and publisher of comic books
principally in North America. The acquired company has been publishing comic
books since 1939 and has developed a roster of more than 3,500 Marvel
Characters. The Company's titles feature classic Marvel Super Heroes and X-
Men, newly developed Marvel Characters, and characters created by other
entities and licensed to the Company.
 
                                     F-26
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
 
 Licensing Segment
 
   The Company acquired its licensing segment on October 1, 1998 (see Note 1).
 
   The licensing segment relates to the licensing of or joint ventures
involving the Marvel Characters for use with (i) merchandise, (ii) promotions,
(iii) publishing, (iv) television and film, (v) on-line and interactive
software and (vi) restaurants, theme parks and site-based entertainment.
 
<TABLE>
<CAPTION>
                                        Toys    Publishing Licensing  Total
                                      --------  ---------- --------- --------
                                                  (in thousands)
<S>                                   <C>       <C>        <C>       <C>
Year ended December 31, 1996
Net sales............................ $221,624     --         --     $221,624
Gross profit.........................  105,169     --         --      105,169
Operating income.....................   27,215     --         --       27,215
EBITDA(1)............................   43,293     --         --       43,293
Total capital expenditures...........   23,848     --         --       23,848
<CAPTION>
                                        Toys    Publishing Licensing  Total
                                      --------  ---------- --------- --------
<S>                                   <C>       <C>        <C>       <C>
Year ended December 31, 1997
Net sales............................ $150,812     --         --     $150,812
Gross profit.........................   43,861     --         --       43,861
Operating (loss).....................  (49,288)    --         --      (49,288)
EBITDA(1)............................  (28,220)    --         --      (28,220)
Total capital expenditures...........   17,744     --         --       17,744
Identifiable assets for continuing
 operations.......................... $146,770     --         --     $146,770
Net assets held for disposition......    4,136     --         --        4,136
                                      --------     ---        ---    --------
Total identifiable assets............ $150,906     --         --     $150,906
</TABLE>
 
 
 
<TABLE>
<CAPTION>
                             Toys    Publishing Licensing  Corporate  Total
                           --------  ---------- ---------  --------- --------
                                       (in thousands)
<S>                        <C>       <C>        <C>        <C>       <C>
Year ended December 31,
 1998
Net sales................. $212,436   $ 14,707  $  4,933        --   $232,076
Gross profit..............   92,743      6,820     4,535        --    104,098
Operating (loss)..........  (18,742)       258      (976)       --    (19,460)
EBITDA(1).................    1,259      1,409     4,295        --      6,963
Total capital
expenditures..............   17,325        --        --         --     17,325
Identifiable assets for
 continuing operations.... $149,842   $101,697  $401,098    $11,267  $663,904
Net assets held for
 disposition..............      --      26,000       --         --     26,000
                           --------   --------  --------    -------  --------
Total identifiable
 assets................... $149,842   $127,697  $401,098    $11,267  $689,904
</TABLE>
--------
(1) "EBITDA" is defined as earnings before extraordinary items, interest
    expense, taxes, depreciation and amortization. EBITDA does not represent
    net income or cash flow from operations as those terms are defined by
    generally accepted accounting principles and does not necessarily indicate
    whether cash flows will be sufficient to fund cash needs.
 
 See Note 8 regarding sales to major customers and international operations of
                          the Company's toy business.
 
                                     F-27
<PAGE>
 
                           MARVEL ENTERPRISES, INC.
 
                           (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
16.Supplemental Financial Information
 
   The following represents the supplemental consolidating condensed financial
statements of Marvel Enterprises, Inc., which will be the issuer of the Notes,
and its subsidiaries that will guarantee the Notes and the non-guarantor
subsidiaries as of December 31, 1997 and 1998 and for each of the three years
in the period ended December 31, 1998.
<TABLE>
<CAPTION>
                                         Issuer
                                          and        Non-
                                       Guarantors Guarantors  Total
                                       ---------- ---------- --------
                                               (in thousands)
<S>                                    <C>        <C>        <C>       <C>
For The Year Ended December 31, 1996
Net sales.............................  $176,641   $44,983   $221,624
Gross profit..........................    82,815    22,354    105,169
Operating income......................    12,116    15,099     27,215
Net income............................     3,526    13,161     16,687
For The Year Ended December 31, 1997
Net sales.............................  $117,571   $33,241   $150,812
Gross profit..........................    33,542    10,319     43,861
Operating (loss) income...............   (55,205)    5,917    (49,288)
Net (loss) income.....................   (34,613)    5,148    (29,465)
For The Year Ended December 31, 1998
Net sales.............................  $198,358   $33,718   $232,076
Gross profit..........................    91,293    12,805    104,098
Operating (loss) income...............   (23,784)    4,324    (19,460)
Net (loss) income.....................   (36,529)    3,919    (32,610)
<CAPTION>
                                         Issuer
                                          and        Non-     Inter-
                                       Guarantors Guarantors company    Total
                                       ---------- ---------- --------  --------
December 31, 1997
<S>                                    <C>        <C>        <C>       <C>
Current assets .......................  $107,430   $28,346   $(18,804) $116,972
Non-current assets....................    28,990     4,944        --     33,934
                                        --------   -------   --------  --------
Total assets..........................  $136,420   $33,290   $(18,804) $150,906
                                        ========   =======   ========  ========
Current and total liabilities.........    53,430     8,299    (18,804)   42,925
Stockholders' equity..................    82,990    24,991        --    107,981
                                        --------   -------   --------  --------
                                        $136,420   $33,290   $(18,804) $150,906
                                        ========   =======   ========  ========
December 31, 1998
Current assets........................  $167,921   $29,571   $(24,908) $172,584
Non-current assets....................   512,667     4,653        --    517,320
                                        --------   -------   --------  --------
Total assets..........................  $680,588   $34,224   $(24,908) $689,904
                                        ========   =======   ========  ========
Current liabilities...................   325,471     5,413    (24,908)  305,976
Non-current liabilities...............    27,924       --         --     27,924
8% Preferred Stock....................   172,380       --         --    172,380
Stockholders' equity..................   154,813    28,811        --    183,624
                                        --------   -------   --------  --------
                                        $680,588   $34,224   $(24,908) $689,904
                                        ========   =======   ========  ========
</TABLE>
 
                                     F-28
<PAGE>
 
                            MARVEL ENTERPRISES, INC.
 
                            (formerly Toy Biz, Inc.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
<TABLE>
<CAPTION>
                                                  Issuer
                                                   and         Non-
                                                Guarantors  Guarantors   Total
                                                ----------  ---------- ---------
                                                        (in thousands)
<S>                                             <C>         <C>        <C>
Year Ended December 31, 1996
Cash Flows From Operating Activities:
Net Income..................................... $   3,526    $13,161   $  16,687
                                                =========    =======   =========
  Net cash provided by (used in) operating
   activities..................................      (191)      (681)       (872)
  Net cash provided by (used in) investing
   activities..................................   (24,024)       176     (23,848)
  Net cash provided by (used in) financing
   activities..................................     8,258        --        8,258
                                                ---------    -------   ---------
Net increase (decrease) in cash................   (15,957)      (505)    (16,462)
Cash, at beginning of period...................    21,108      1,376      22,484
                                                ---------    -------   ---------
Cash, at end of period......................... $   5,151    $   871   $   6,022
                                                =========    =======   =========
Year Ended December 31, 1997
Cash Flows From Operating Activities:
Net Income..................................... $ (34,563)   $ 5,098   $ (29,465)
                                                =========    =======   =========
  Net cash provided by (used in) operating
   activities..................................    13,191       (440)     12,751
  Net cash provided by (used in) investing
   activities..................................   (22,503)       203     (22,300)
  Net cash provided by (used in) financing
   activities..................................    11,123        --       11,123
                                                ---------    -------   ---------
Net increase (decrease) in cash................     1,811       (237)      1,574
Cash, at beginning of period...................     5,151        871       6,022
                                                ---------    -------   ---------
Cash, at end of period......................... $   6,962    $   634   $   7,596
                                                =========    =======   =========
Year Ended December 31, 1998
Cash Flows From Operating Activities:
Net Income..................................... $ (36,429)   $ 3,819   $ (32,610)
                                                =========    =======   =========
  Net cash provided by (used in) operating
   activities..................................    28,454        545      28,999
  Net cash provided by (used in) investing
   activities..................................  (272,634)       230    (272,404)
  Net cash provided by (used in) financing
   activities..................................   279,500        --      279,500
                                                ---------    -------   ---------
Net increase (decrease) in cash................    35,320        775      36,095
Cash, at beginning of period...................     6,962        634       7,596
                                                ---------    -------   ---------
Cash, at end of period......................... $  42,282    $ 1,409   $  43,691
                                                =========    =======   =========
</TABLE>
 
                                      F-29
<PAGE>
 
                            MARVEL ENTERPRISES, INC.
 
                            (formerly Toy Biz, Inc.)
 
                                  SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                      Allowances
                           Balance    Acquired in Charged to Sales Charged to             Balance
                         at Beginning     MEG       or Costs and     Other                at End
      Description         of Period   Acquisition     Expenses      Accounts  Deductions of Period
      -----------        ------------ ----------- ---------------- ---------- ---------- ---------
                                                      (in thousands)
<S>                      <C>          <C>         <C>              <C>        <C>        <C>
Year Ended December 31,
 1996
Allowances included in
 Accounts Receivable.
 Net:
Doubtful accounts--
 current................   $   516         --             --          --            31    $   485
Advertising, markdowns,
 returns, volume
 discounts and other....    10,755         --          39,317(2)      --        35,216     14,856
Year Ended December 31,
 1997
Allowances included in
 Accounts Receivable.
 Net:
Doubtful accounts--
 current................       485         --             --          --            55        430
Advertising, markdowns,
 returns, volume
 discounts, and other...    14,856         --          55,746(2)      --        41,215     29,387
Year Ended December 31,
 1998
Allowances included in
 Accounts Receivable.
 Net:
Doubtful accounts--
 current................       430       3,112            409(1)      --           343      3,608
Doubtful accounts--non-
 current................       --          521            --          --           --         521
Advertising, markdowns,
 returns, volume
 discounts and other....    29,387       6,255         33,998(2)      --        48,325     21,315
</TABLE>
--------
(1) Charged to costs and expenses.
(2) Charged to sales.
 
 
                                      F-30