UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2004

                                       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)

         Delaware                                  13-3711775

  (State of incorporation)             (I.R.S. employer identification number)

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

                                 (212) 576-4000
              (Registrant's telephone number, including area code)
          Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of each exchange
           Title of each class                     on which registered
           -------------------                     -------------------
   Common Stock, par value $.01 per share        New York Stock Exchange
         Preferred Share Purchase Rights         New York Stock Exchange

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

         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. |_|


<PAGE>


         Indicate by check mark whether the Registrant is an  accelerated  filer
(as defined in Exchange Act Rule 12b-2). Yes |X| No |_|

         The  approximate  aggregate  market value of the voting and  non-voting
common equity held by  non-affiliates of the Registrant as of June 30, 2004, the
last  business day of the  Registrant's  most recently  completed  second fiscal
quarter,  was  $1,646,905,269  based on a price of $19.52 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 3, 2005,  there
were 105,358,225 outstanding shares of the Registrant's common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

<PAGE>

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

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

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

         Financial  difficulties  of  licensees.  We have  granted  to a  single
licensee an exclusive license for the manufacture and sale of action figures and
accessories  and other lines of toys featuring all of our characters  other than
those based on movies and TV shows  featuring  Spider-Man  and  produced by Sony
Pictures.  Our revenues  from sales of toys could be adversely  affected if that
licensee,  or any of  our  other  significant  licensees,  experience  financial
difficulties or bankruptcy.

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

         Movie- and  television-production  delays and cancellations.  We do not
control the  decision to proceed  with the  production  of films and  television
programs  based on characters  that we license to movie studios or the timing of
releases of those films and programs.  Delays or cancellations of proposed films
and  television  programs  could have an adverse  effect on our business.  Dates
expressed  in this  Annual  Report on Form 10-K for the  anticipated  release of
films and launch dates for television  programs are  anticipated  dates only and
those events could be delayed or, in some instances, even cancelled.

         Toy-production  delays or shortfalls,  continued  concentration  of toy
retailers   and  toy  inventory   risk.   The  retail  toy  business  is  highly
concentrated.  The  three  largest  customers  for the  toy  products  which  we
manufacture for our resale accounted, in the aggregate, for approximately 56% of
our total toy sales in 2004.  An  adverse  change  in, or  termination  of,  the
relationship  between us or our major toy-producing  licensee and one or more of
our major customers could have a material adverse effect on us. In addition, the
bankruptcy or other lack of success of one or more of our significant  retailers
could  decrease  our  earnings.  Our  production  of  excess  products  to  meet
anticipated  retailer  demand could result in markdowns and increased  inventory
carrying costs for us on even our most popular items. If we fail to anticipate a
high demand for our products, however, we face the risk that we may be unable to
provide adequate supplies of popular toys to retailers in a timely fashion,  and
may consequently lose sales opportunities.

         Currency  fluctuations  and/or the  imposition  of quotas or tariffs on
products manufactured in China. A large number of our licensees' products (whose
sales may entitle us to royalty  payments),  and the toys which are manufactured
for our  resale,  are  manufactured  in  China,  which  subjects  us to risks of
currency  fluctuations,  transportation delays and interruptions,  and political
and  economic  disruptions.  Appreciation  of the Chinese  Yuan against the U.S.
Dollar could reduce the  profitability of toys that we manufacture in China, and
reduce the demand


                                       i
<PAGE>


for Marvel licenses by licensees who manufacture in China. Our ability, and that
of our licensees,  to obtain  products from Chinese  manufacturers  is dependent
upon the United States' trade  relationship  with China. The imposition of trade
sanctions  on China could result in  significant  supply  disruptions  or higher
merchandise  costs  to us.  Our  licensees  and we  might  not be  able  to find
alternate sources of manufacturing  outside China on acceptable terms even if we
want or need  to.  Our  inability  or our  licensees'  inability  to find  those
alternate sources could have a material adverse effect on us.

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


                                       ii
<PAGE>

<TABLE>
<CAPTION>
                                             TABLE OF CONTENTS
                                                                                                               PAGE

<S>      <C>                                                                                                     <C>
PART I   ........................................................................................................1

         Item 1.  BUSINESS.......................................................................................1

         Item 2.  PROPERTIES.....................................................................................7

         Item 3.  LEGAL PROCEEDINGS..............................................................................7

         Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................8

PART II  ........................................................................................................8

         Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                  PURCHASES OF EQUITY SECURITIES.................................................................8

         Item 6.  SELECTED FINANCIAL DATA.......................................................................10

         Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........11

         Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................27

         Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................28

         Item 9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND FINANCIAL
                  DISCLOSURE....................................................................................28

         Item  9A.  CONTROLS AND PROCEDURES.....................................................................28

         Item  9B.  OTHER INFORMATION...........................................................................28

PART III .......................................................................................................29

         Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................29

         Item 11. EXECUTIVE COMPENSATION........................................................................29

         Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
                  MATTERS.......................................................................................29

         Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................29

         Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................29

PART IV ........................................................................................................29

         Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES....................................................29

SIGNATURES......................................................................................................33

CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE................................F-1

</TABLE>


                                       iii
<PAGE>


                                     PART I

ITEM 1.  BUSINESS

         Unless the context otherwise  requires,  the term "the Company" and the
term "Marvel" each refer to Marvel  Enterprises,  Inc., a Delaware  corporation,
and its  subsidiaries.  Certain of the characters and properties  referred to in
this Report are subject to copyright and/or trademark protection.

General

         The  Company  is one  of the  world's  most  prominent  character-based
entertainment  companies,  with a proprietary  library of over 5,000 characters.
The Company  operates in the  licensing,  publishing  and toy businesses in both
domestic  and  international   markets.  The  Company's  library  of  characters
includes, but is not limited to, Spider-Man,  X-Men, The Incredible Hulk, Blade,
Man-Thing, Daredevil, Elektra, The Punisher, Captain America, The Fantastic Four
(including Mr. Fantastic,  Human Torch,  Invisible Woman and The Thing),  Namor,
Nick Fury, Luke Cage, Black Widow, Black Panther,  Deathlok, Thor, The Avengers,
Silver Surfer,  Ant-Man, Iron Man, Shang-Chi,  Power Pack, Dr. Strange and Ghost
Rider, and is one of the oldest and most recognizable  collections of characters
in the entertainment industry.

         The   Company's   business  is  divided  into  three   integrated   and
complementary operating segments: its Licensing segment,  Publishing segment and
Toy segment. The Company has reevaluated and revised certain revenue and expense
classifications  within its internal reporting of segment performance,  the same
reporting that is used by executive  management to monitor and make decisions on
operating matters.  As a result,  during the fourth quarter of 2004, the Company
began classifying  revenue from its master toy licensee,  Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment.  Previously, such revenue
and expenses were classified within the Company's  Licensing  segment.  Revenues
from TBW  reflect a broader  set of efforts on the part of the  Company  than do
revenues from the Company's other licensees. All TBW toys produced under license
from  the  Company  are  created,  designed,  marketed  and  sold for TBW by the
Company's Toy segment,  under an agency  agreement  between TBW and the Company.
This is unlike other license  arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment  involve efforts that are similar in nature to the efforts
associated  with the Company's own toys,  the Company  believes this change will
better  aggregate  the results  derived from  Marvel-branded  toys  developed by
Marvel and more clearly reflect  operating results used by management to measure
the  performance  of the Toy  operations.  The Company  also  believes  that the
classification  of earnings  from TBW will better  portray  trends in Marvel toy
brands  designed  and  marketed  by the  Company.  As a result  of this  change,
prior-period  segment  information  has been  reclassified  to conform  with the
current year presentation.

         The Company and Sony Pictures Entertainment Inc. ("Sony Pictures") have
entered  into a joint  venture,  called  Spider-Man  Merchandising  LP,  for the
purpose of pursuing  licensing  opportunities  relating to characters based upon
movies or television  shows featuring  Spider-Man and produced by Sony Pictures.
Effective April 2004, the operations of the joint venture have been consolidated
in the Company's accompanying consolidated financial statements.  Prior to 2004,
the Company filed  financial  statements of the joint venture as an amendment to
the Company's Annual Report on Form 10-K.

Licensing

         The Licensing  segment  licenses the Company's  characters for use in a
wide  variety  of  products,   including  toys,   electronic   games,   apparel,
accessories,  footwear, collectibles and novelties. As of December 31, 2004, the
Company had over 550 active  license  contracts  in domestic  and  international
markets.  The  Licensing  segment  also  receives  fees  from the  execution  of
licensing agreements to a variety of media, including feature films,  television
programs, video games, animation and destination-based  entertainment (including
theme parks), and from the sale of licenses for promotional use.


                                       1
<PAGE>


     Feature Films

         The Company has  licensed  various  Marvel  characters  to major motion
picture studios for use in motion pictures.  For example,  the Company currently
has licenses with Sony Pictures to produce motion pictures featuring Spider-Man,
Ghost  Rider and Luke Cage and with  Twentieth  Century  Fox to  produce  motion
pictures featuring X-Men, The Fantastic Four and Silver Surfer.  Marvel also has
outstanding  licenses  with  studios  for a  number  of  its  other  characters,
including  Iron Man, The Punisher and Black  Widow.  Under these  licenses,  the
Company  generally  retains  control over  merchandising  rights and receives at
least 50% of merchandising-based royalty revenue.

     Television Programs

         The Company  also  licenses  Marvel  characters  for use in  television
programs,  which fuel additional  brand awareness for the Company's  characters.
These television programs have included X-Men:  Evolution,  a half-hour animated
show that was produced by the Company and is distributed by Warner  Brothers and
appeared  on the WB  Kids!  network  and  the  Cartoon  Network  and on  foreign
television stations,  and Mutant X, a live action show, which airs on syndicated
television.  The most  recent  Marvel  program to be  broadcast  is a  half-hour
animated show, produced by Sony Pictures,  featuring Spider-Man. This show aired
in the summer of 2003 on MTV in the United  States,  and is being  marketed  for
international  distribution.  Several  live-action and animated television shows
based on other Marvel Characters are currently in development.

     Made-for-DVD Animated Feature Films

         The Company licenses Marvel characters to an entity controlled by Lions
Gate Films to produce (under the Company's  direction) up to ten  feature-length
animated films for distribution by Lions Gate directly to the home video market.
The first feature, Ultimate Avengers, is scheduled for release in January 2006.

     Destination-Based Entertainment

         The Company licenses Marvel characters for use at theme parks, shopping
malls and  special  events.  For  example,  Marvel has  licensed  the  Company's
characters for use at Marvel Super Hero Island, part of the Islands of Adventure
theme park at Universal Orlando in Orlando,  Florida, for character  appearances
and short  live-action  shows at Universal  Studios  Hollywood  and for use in a
Spider-Man  attraction at the Universal  Studios theme park in Osaka,  Japan. In
addition, The Canadian Niagara Group operates a "retail-tainment" destination at
Niagara Falls that incorporates  Marvel-based  characters into rides,  games and
retail space.

     Toy Merchandise

         As described above under "General,"  during the fourth quarter of 2004,
the Company began classifying  earnings from TBW, and related  expenses,  within
its Toy segment. Previously, such revenues and expenses were included within the
Company's Licensing segment.

     Consumer Products

         Marvel  licenses its  characters  for use in a wide variety of consumer
products, including apparel,  interactive games, electronics,  stationery, gifts
and novelties, footwear and collectibles.

     Promotions

         Marvel also licenses its characters for use by companies for short-term
tie-in  promotions  that are executed in forms such as  advertisements,  premium
programs,  sweepstakes  and contests to consumers  and/or the  companies'  trade
markets.  In the 2005  television  broadcast  of the Super Bowl,  for  instance,
Marvel  characters  were  featured in a Visa card  commercial  that was produced
under license from the Company.


                                       2
<PAGE>


     Publications

         Marvel's  Licensing segment licenses Marvel's  characters to publishers
located  outside the United States for use in  foreign-language  comic books and
trade paperbacks.

Publishing

         Marvel's Publishing segment has been publishing comic books since 1939.
Marvel's titles feature,  among other  characters,  classic Marvel Super Heroes,
newly developed Marvel characters,  and characters created by other entities and
licensed  to Marvel.  Marvel's  characters  have been  developed  through a long
history  of comic  book  plots and  storylines  that give each of them their own
personality, context and depth.

         The  Publishing  segment'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 Company's characters exist
in the  "Marvel  Universe,"  a  fictitious  universe  that  provides  a unifying
historical and contextual  background  for the  characters and  storylines.  The
"Marvel Universe" concept permits Marvel 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 Black Panther and Wolverine have been
developed and are now popular  characters in their own right and are featured in
their own comic books. The "Marvel  Universe"  concept also allows Marvel 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.

     Customers, Marketing and Distribution

         The Publishing  segment's primary target market for its comic books has
been  male  teenagers  and  young  adults  in the 13 to 23 year  old age  group.
Established  readership of Marvel's comic books also extends to readers in their
mid-thirties.  Management  believes there are two primary purchasers of Marvel'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's  comic  book   publications  are  distributed   through  three
channels:  (i) to comic book  specialty  stores on a  non-returnable  basis (the
"direct market"),  (ii) to traditional retail outlets,  including bookstores and
newsstands,   on  a  returnable  basis  (the  "mass  market")  and  (iii)  on  a
subscription sales basis.

         For the years ended  December  31, 2002,  2003 and 2004,  approximately
76%, 71% and 70%,  respectively,  of the Publishing  segment's net revenues were
derived from sales to the direct market.  Marvel distributes its publications to
the direct market through an unaffiliated  entity  (Diamond Comic  Distributors,
Inc.).   Marvel  prints  periodicals  to  order  for  the  direct  market,  thus
eliminating the cost of printing and marketing excess inventory.

         For the years ended  December  31, 2002,  2003 and 2004,  approximately
14%, 12% and 13%,  respectively,  of the Publishing  segment's net revenues were
derived from sales to the mass market.  The  Publishing  segment's  sales to the
mass market also include trade  paperbacks-compilations  of  previously  printed
material collected to tell a "complete" story.

         In  addition  to  revenues  from the sale of comic  books to the direct
market and the mass market,  the Publishing  segment derives revenues from sales
of advertising,  subscriptions and other publishing  activities,  such as custom
comics. For the years ended December 31, 2002, 2003 and 2004, approximately 10%,
17% and 17%, respectively, of the Publishing segment's net revenues were derived
from those sources.  Advertising income increased roughly 50% from 2002 to 2003,
and was a major driver in this subset.  In most of Marvel's comic  publications,
ten pages (three  glossy cover pages and seven inside  pages) are  allocated for
advertising.  The Publishing segment permits advertisers to advertise in a broad
range of Marvel's comic book  publications or to advertise in specific groups of
titles whose readership's age is suited to the advertiser.


                                       3
<PAGE>

Toys

         Marvel's  Toy  segment   creates,   designs,   develops,   markets  and
distributes a limited line of toys to the worldwide  marketplace.  The Company's
toy products are based upon movies and television shows featuring Spider-Man and
produced by Sony Pictures and upon  characters that the Company has licensed in,
such as characters from the movie trilogy The Lord of the Rings,  the television
shows for Total Nonstop  Action  ("TNA")  wrestling and the movie and television
shows, still in production, based on the character Curious George.

         As described above under "General,"  during the fourth quarter of 2004,
the Company began classifying  earnings from TBW, and related  expenses,  within
its Toy segment. Previously, such revenues and expenses were included within the
Company's Licensing segment.

         In July 2001, the Company entered into a 5 1/2 year exclusive licensing
agreement  with TBW,  an  unrelated  Hong Kong based  company,  for the sale and
manufacture of toy action figures and accessories,  and certain other toys, that
feature Marvel characters other than those based upon movies or television shows
featuring  Spider-Man  and  produced  by Sony  Pictures.  TBW is licensed by the
Company to use  the Toy  Biz  name -- a name  also  used  by the  Company -- for
marketing  purposes,  but the Company has no ownership interest in TBW or in any
of its  affiliates,  and the Company has no financial  obligations or guarantees
related to TBW or any of its affiliates.  The agreement  represented a strategic
decision by the Company to eliminate much of the risk and investment  previously
associated  with the direct  manufacture  and sale of these  lines of toys while
enabling the Company to participate in their success through  ongoing  licensing
fees. Under an agency agreement whose term is the same as the license agreement,
Marvel's Toy segment creates, designs and markets products. In addition, the Toy
Segment  performs sales and billing,  and all inventory  management and customer
relations for TBW with respect to Marvel-licensed toys. Marvel receives fees for
all of these services based on the wholesale value of toys sold.

         During  2002 and 2004,  the only line of  products  to account for more
than 10% of the  Company's  consolidated  net revenue was the line of toys based
upon  Spider-Man:  The Movie and upon the movie  Spider-Man 2. In 2003, the only
product line accounting for over 10% of the Company's  consolidated  net revenue
was toys based on the movie trilogy The Lord of The Rings.

     Design and Development

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

         The Toy  segment  relies on TBW and/or  its  affiliate  to  manufacture
directly, and to oversee the manufacture, in China, of most of its products. The
Company   uses  Acts   Testing   Labs  (H.K.)   Ltd.,   a  leading   independent
quality-inspection  firm,  to  monitor  quality  control  of the  Toy  segment's
products.

     Customers, Marketing and Distribution

         The Toy segment  markets  and  distributes  its  products in the United
States  and  internationally,  with  sales to  customers  in the  United  States
accounting for approximately  77%, 76% and 65% of the Company's net toy sales in
2002,  2003  and  2004,  respectively.  The Toy  segment's  products  are  aimed
primarily at boys aged 4-12 and collectors.

         Outlets for the Company's toys 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 the Company
and  ship  them to  retail  outlets.  The  Company's  customer  base for toys is
becoming increasingly  concentrated.  The Toy segment's three largest customers,
currently  Wal-Mart Stores,  Inc., Toys 'R' Us, Inc. and Target Stores,  Inc. (a
division of Target Corp.),  accounted in the aggregate for  approximately 56% of
the Company's  total toy sales in 2004.  Kay-Bee Toy Stores,  previously a major
customer,  filed for  bankruptcy  protection in January 2004. The amount owed by
Kay-Bee to the Company, pre-filing, was not significant and shipments of product
(collateralized by letters of credit in advance) continue to Kay-Bee.

         The Toy segment  produces its products  for foreign  customers  and for
most of its domestic  customers to order,  and sells them "FOB" East Asia.  When
the Toy segment sells products FOB East Asia, title to the products,


                                       4
<PAGE>


along with risk of loss, passes to the customer in Asia, where the Toy segment's
products are manufactured.  Furthermore, the Toy segment does not sell on either
a guaranteed-sale  (returnable) basis or a consignment basis. As a result of its
sales terms and of the license to TBW, the Toy segment has significantly reduced
both the likelihood  that the Company will find itself with excess toy inventory
and the exposure of the Company to pressure from  retailers for  concessions  in
the event that retailers  have excess Marvel toy  inventory.  As a result of its
production practices and sales terms, the Toy segment had inventory of only $1.3
million at December 31, 2004. A disadvantage  of these  practices,  however,  is
that the Toy segment increases its risk of having fewer products  available,  in
the event of unforeseen demand, than might otherwise have been sold.

Intellectual Property

         The Company  believes that its most valuable  assets are its library of
proprietary characters, the stories it has published for decades, the associated
copyrights,  trademarks  and  goodwill  and the  Company's  "Marvel" and "Marvel
Comics" trade names.  The Company  believes  that its library of characters  and
stories could not easily be replicated. The Company currently conducts an active
program of maintaining  and protecting its  intellectual  property rights in the
United States and in approximately 55 other countries.  The Company's  principal
trademarks  have been  registered  in the  United  States  and in certain of the
countries in Western  Europe,  Latin America,  Asia  (including many Pacific Rim
countries),  the  Middle  East and  Africa.  While the  Company  has  registered
numerous  trademarks  in these  countries,  and expects  that its rights will be
protected there,  certain  countries either do not have laws that protect United
States holders of intellectual property equivalent to laws in the United States,
or Marvel's  rights can be difficult  to enforce,  and there can be no assurance
that the Company's  rights will not be violated or its  characters  "pirated" in
certain countries.

Advertising

         Although  a portion  of the  Company's  advertising  budget for its toy
products is expended for newspaper advertising,  magazine advertising,  catalogs
and other  promotional  materials,  the  Company  allocates  a  majority  of its
advertising  budget for its toy products to  television  promotion.  The Company
advertises on national  television  and purchases  advertising  spots on a local
basis. Management believes that television programs underlying the Company's toy
product  lines  increase  exposure  and  awareness.  The  Company  does  not  do
significant advertising for its Licensing or Publishing segments.

         The Company  currently  engages  Tangible Media,  Inc.  ("Tangible") to
purchase most of its advertising. The Company does not have a long-term contract
with Tangible but makes all purchases of advertising from Tangible on a purchase
order basis.  These  purchase  orders are  cancelable by the Company on 30 days'
notice to Tangible. Tangible is an affiliate of Isaac Perlmutter. Mr. Perlmutter
is Chief Executive Officer of the Company,  Vice Chairman of the Company's Board
of Directors and the Company's  largest  stockholder.  The Company believes that
the services provided by Tangible are provided on terms and for fees that are at
least as  favorable  as could be obtained by the  Company in  transactions  with
unrelated  media  buying  agencies.  The Company also retains the services of an
unrelated advertising agency.

Competition

         The industries in which the Company competes are highly competitive.

         The  Licensing  segment  competes with a diverse range of entities that
own intellectual  property rights in characters.  These include DC Comics (which
is owned by Time Warner,  Inc.),  The Walt Disney Company,  NBC Universal,  Inc.
(which   is   80%-owned   by   the   General   Electric   Company)   and   other
entertainment-related entities. Many of these competitors have greater financial
and other resources than the Company.

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


                                       5
<PAGE>


         The Toy  segment  competes,  on its own behalf and in its  capacity  as
agent for TBW, with many larger toy companies in the design and  development  of
new toys, in the procurement of licenses and for adequate retail shelf space for
its products.  The larger toy companies  include Hasbro,  Inc., Mattel Inc., and
Jakks Pacific,  Inc. 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.

Employees

         As of  December  31,  2004,  the  Company  employed  230  persons.  All
employees of the Company are  compensated,  in part, by equity or phantom equity
awards, which align their interests with those of the stockholders.  The Company
also  contracts  for creative  work on an  as-needed  basis with over 400 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.

Financial Information about Geographic Areas

         The following table sets forth revenues from external customers
attributed to geographic areas:
<TABLE>
<CAPTION>
                                      Revenue by Geographic Area*

--------------------------------------------------------------------------------------------------------
                                            (in thousands)
                             2002                          2003                         2004
                 -----------------------------  ---------------------------  ---------------------------

                     U.S.           Foreign         U.S.         Foreign         U.S.           Foreign
                 ---------------------------------------------------------------------------------------

<S>                <C>            <C>             <C>           <C>           <C>             <C>
Licensing.......   $  47,565      $   10,189      $ 106,264     $  18,185     $ 173,806       $  40,928
Publishing......      53,678          10,823         61,363        11,892        72,779          13,164
Toys............     132,434          44,357        118,687        31,235       140,092          72,699
                 -------------- --------------  ------------- -------------  ------------- -------------
Total...........   $ 233,677      $   65,369      $ 286,314     $  61,312     $ 386,677       $ 126,791
                 ============== ==============  ============= =============  ============= =============
</TABLE>

* $13,560, $54,080, and $11,446 of the domestic toy revenue and $8,248, $10,675
and $3,741 of the foreign toy revenues for 2002, 2003 and 2004, respectively,
are attributable to royalties and service fees from toy sales generated by TBW,
which is based in Hong Kong.


Government Regulations

         The Company is subject to the  provisions  of,  among  other laws,  the
Federal  Hazardous  Substances Act and the Federal  Consumer Product Safety Act.
Those laws  empower the  Consumer  Product  Safety  Commission  (the  "CPSC") to
protect  children  from  hazardous  toys and  other  articles.  The CPSC has the
authority to exclude from the market  articles  that 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.

Available Information

         Marvel's Internet address is www.marvel.com. Marvel's annual reports on
Form 10-K,  quarterly  reports on Form 10-Q,  current  reports on Form 8-K,  and
amendments to those reports are available,  free of charge, on Marvel's Internet
website,  and are posted there as soon as  reasonably  practicable  after Marvel
electronically  files them with the Securities and Exchange  Commission.  Marvel
also makes  available on this  website its Code of Business  Conduct and Ethics,
its  Code of  Ethics  for the  Chief  Executive  Officer  and  Senior  Financial
Officers,  its Corporate


                                       6
<PAGE>


Governance  Guidelines and the charters of the following  committees of Marvel's
Board of Directors:  the Audit  Committee,  the  Compensation  Committee and the
Nominating and Corporate Governance Committee.  Marvel is providing its Internet
address  solely for the  information  of  investors.  Marvel does not intend the
address to be an active link or to  otherwise  incorporate  the  contents of the
website into this report.  Printed copies of the information referred to in this
paragraph are also available on written  request sent to:  Corporate  Secretary,
Marvel Enterprises, Inc., 10 E. 40th Street, New York, New York 10016.

Certification with the New York Stock Exchange

         On June 3, 2004,  Marvel's Chief Executive  Officer filed, with the New
York Stock Exchange,  the CEO certification  regarding Marvel's  compliance with
the  exchange's  corporate  governance  listing  standards as required by Listed
Company Manual Rule 303A.12.


ITEM 2.  PROPERTIES

         The Company has the following principal properties:
<TABLE>
<CAPTION>
Facility                        Location                             Square Feet          Owned/Leased
--------                        --------                             -----------          ------------
<S>                             <C>                                    <C>                <C>
Office (1)                      New York, New York                     64,300             Leased
Office/Showroom (2)(3)          New York, New York                     14,100             Leased
Office (3)                      London, England                         1,300             Leased
Warehouse (2)                   Fife, Washington                         (4)              Leased
Rental (2)(5)                   San Luis, Mexico                       190,000            Owned
Office (3)                      Santa Monica, California                4,900             Leased
Office (3)                      Tokyo, Japan                            3,900             Leased
</TABLE>

(1)  Used by all segments of the Company. This office is scheduled to be
     replaced by another leased office of 65,300 square feet in 2005.
(2)  Used by the Company's Toy segment.
(3)  Used by the Company's Licensing segment.
(4)  The lease payments associated with the warehouse in Fife, Washington, are
     based on cubic feet, measured monthly, and are subject to change depending
     on the capacity devoted to the inventory stored at this location.
(5)  Effective April 1, 2003, the property in San Luis, Mexico was leased by the
     Company to an unaffiliated party.

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 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.

         Brian Hibbs,  d/b/a Comix Experience v. Marvel.  On May 6, 2002, in New
York State Supreme  Court,  County of New York,  Mr. Hibbs  commenced a putative
class action alleging that the Company  breached its own Terms of Sale Agreement
to comic book retailers and resellers, breached its obligation of good faith and
fair dealing,  fraudulently induced plaintiff and other members of the purported
class to buy comics and unjustly enriched itself. Mr. Hibbs sought certification
of the putative class and his  designation as its  representative,  compensatory
damages of $8 million on each cause of action and punitive  damages in an amount
to be  determined  at trial.  The parties have reached a proposed  settlement in
which the retailers  and resellers  would receive a credit to their account with
the  Company's  exclusive  distributor,  depending  on their prior  purchases of
certain comic book issues. The parties tendered that settlement to the Court for
approval,  but it was rejected on technical  grounds.  The parties have appealed
the rejection of the  settlement.  It is not known when the  Appellate  Division
will act on this  matter  or how long it will  take for  final  approval  of the
settlement.  In the event the matter  does not settle,  the  Company  intends to
defend vigorously against the claims made in this action on their merits.


                                       7
<PAGE>


         Stan Lee v. Marvel.  On November 12, 2002, Stan Lee commenced an action
in the United  States  District  Court for the  Southern  District  of New York,
alleging  claims  for  breach  of  his  November  1,  1998  lifetime  employment
agreement.  Mr. Lee claims the right to a 10% profit participation in connection
with all film and television productions that utilize Marvel characters.  Marvel
has answered the  complaint  and denied all of its material  allegations.  After
both Mr. Lee and Marvel made partial summary  judgment  motions,  the Court held
that  Mr.  Lee  is  entitled  to  a  10%  profit   participation  from  Marvel's
exploitation  of theatrical and television  productions,  as well as merchandise
that was both based on motion pictures containing Marvel characters and that was
manufactured  and sold  directly by Marvel.  The Court held that Mr. Lee was not
entitled  to  any  participation  in  merchandise  licensed  to  third  parties.
Discovery on the issues of what profit  Marvel made is  continuing.  Because the
Company has historically  received only a small portion of its revenues from the
exploitation of theatrical and television productions, as opposed to merchandise
licensing  (based on its characters as they appear in its  publications and more
recently in theatrical and television productions),  the Company does not expect
this  litigation to have a material  effect on its future  business or financial
condition. No trial date has been set.

         Tribune  Entertainment  Company v. Marvel Enterprises,  Inc. On October
30, 2003, Tribune  Entertainment  Company  ("Tribune") filed a complaint against
the Company in New York State  Supreme  Court,  New York County.  The  complaint
alleges three causes of action: fraud, negligent  misrepresentation,  and breach
of warranty,  all in  connection  with the license from the Company  under which
Tribune produced the Mutant X television series.  Prior to release of the Mutant
X television series in 2001, both the Company and Tribune were sued by Twentieth
Century Fox Film Corporation  ("Fox"),  the licensee of the X-Men properties for
motion pictures,  among other rights.  That suit was settled between the Company
and Fox in February 2003. According to Tribune's complaint, Tribune settled with
Fox on October 3, 2003.  On December  11,  2003,  the Company  filed its answer,
denying  all  material   allegations   of  Tribune's   complaint  and  asserting
counterclaims.  The action is in the discovery  phase and no trial date has been
set.


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

         During the fourth  quarter of 2004, no matters were submitted to a vote
of security holders of the Company.

                                    PART II

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

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


                                       8
<PAGE>


Fiscal Year                      High                            Low
-----------                      ----                            ---

2003
First Quarter                     $9.21                           $6.11
Second Quarter                   $16.33                           $9.03
Third Quarter                    $15.83                          $11.17
Fourth Quarter                   $21.09                          $15.37

2004
First Quarter                    $23.56                          $18.57
Second Quarter                   $21.55                          $18.67
Third Quarter                    $19.09                          $12.45
Fourth Quarter                   $20.48                          $13.51

         The above stock prices have been adjusted for the 3-for-2  common stock
split that was effected by the Company in March 2004.

         As of March 4, 2005,  the number of holders of record of the  Company's
common stock was 2,521.

         The Company has not declared any dividends on the common stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
<TABLE>
<CAPTION>

                                                                Total number of     Approximate dollar
                                                               shares purchased       value of shares
                    Total number                                  as part of          that may yet be
                    of shares             Average price       publicly announced      purchased under
      Period        purchased(a)         paid per share      plans or programs(b)     the plans or programs
------------------- ----------------    ----------------     --------------------   --------------------

2004
<S>                      <C>                 <C>                     <C>            <C>
July                     26,880              $16.03                         -
August                3,232,930               13.56                 3,215,200
September                     -                -                            -
October               1,035,000               13.96                 1,035,000
November                      -                -                            -
December                      -                -                            -

                    ----------------                         --------------------
 Total                 4,294,810                                     4,250,200         $42.0 million(c)
                    ================                         ====================
</TABLE>

(a)       This  column's   figures  include  44,610  shares   purchased  by  the
          Fleer/Skybox  Plan.  The  Fleer/Skybox   Plan's  purchases  were  made
          pursuant to irrevocable  investment  instructions given to the trustee
          of the

          Fleer/Skybox  Plan on May 25, 2004  pursuant to Rule 10b5-1  under the
          Securities  Exchange  Act of 1934.  Those  instructions  required  the
          trustee to buy and sell Company  stock  pursuant to a formula  through
          August 5, 2004.

(b)       This column  represents the number of shares  repurchased  through the
          share repurchase  program  announced on July 12, 2004, under which the
          Company is  authorized  to repurchase up to $100 million of its common
          stock through January 11, 2006.

(c)       As of December 31, 2004.
                                       9
<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA

         The following table presents selected consolidated financial data,
derived from the Company's audited financial statements, for the five-year
period ended December 31, 2004. The Company has not declared dividends on its
common stock during any of the periods presented below.
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                         -----------------------------------------------------------------------------

                                             2000            2001            2002            2003            2004
                                             ----            ----            ----            ----            ----
                                                           (in thousands, except per share amounts)
<S>                                        <C>           <C>              <C>            <C>             <C>
Statements of Operations Data:
Net sales.............................     $ 231,651     $ 181,224        $ 299,046      $ 347,626       $ 513,468
Operating (loss) income..............        (59,253)        1,293           80,524        167,222         224,413
(Loss) income before income tax
  expense, minority interest,
  extraordinary gain and cumulative
  effect of change in accounting
  principle                                  (86,931)      (26,826)          38,676        150,372         206,872
(Loss) income from continuing
operations............................       (89,858)      (27,473)          26,774        151,648         124,877
(Loss) income from continuing
  operations per common share........          (2.09)        (0.85)           (0.72)          1.50            1.17
Extraordinary item...................             --        32,738               --             --              --
Cumulative effect of change in
  accounting principle (1)...........             --            --           (4,164)            --              --
Net (loss) income (2)................        (89,858)        5,265           22,610        151,648         124,877
Diluted net (loss) income
  per common share (2)...............          (2.09)        (0.21)           (0.79)          1.34            1.10
Preferred dividends..................         15,395        16,034           68,132          1,163              --
Goodwill amortization (1)............         23,769        23,465               --             --              --
Pro forma net (loss) income from
  Continuing operations (1)..........        (66,089)       (4,008)          26,774        151,648         124,877
Pro forma (loss) income from
  continuing operations per share
(1)(2)...............................          (1.61)        (0.39)           (0.72)          1.50            1.17
Pro forma net (loss) income (1)......        (66,089)       28,730           22,610        151,648         124,877
Pro forma diluted net (loss) income
per common share (1)(2)..  .........           (1.61)         0.25            (0.79)          1.34            1.10


                                                                  December 31,
                                        ------------ --------------- ---------------- ---------------- ---------------
                                               2000            2001             2002         2003            2004
                                               ----            ----             ----         ----            ----
Balance Sheet Data:
Working Capital.................           $ 43,067        $ 29,990         $ 32,604      $214,198        $142,231
Total assets....................            553,957         517,570          517,519       741,857         714,814
Borrowings......................                 --          37,000               --            --              --
Other non-current debt..........            250,000         150,962          150,962       150,962              --
Redeemable preferred stock......            202,185         207,975           32,780            --              --
Stockholder's equity............             31,396          41,958          242,869       469,450         546,500
</TABLE>

(1)  Had the Company adopted SFAS 142 on October 1, 1998 (the date the
     Company acquired MEG), the basic and diluted net (loss) income per common
     share would have changed to the pro forma amounts indicated above.
(2)  Net (loss) income per common share, unlike net (loss) income, is net of
     preferred dividends.


                                       10
<PAGE>



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

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

         Set forth below is a discussion of the financial  condition and results
of operations of the Company for the three fiscal years ended December 31, 2004.

Overview

     Management Overview of Business Trends

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

         A key driver of operating  results is the  successful  release of major
entertainment  programming,  such as movies,  published materials and television
shows, based on the Company's  characters,  which fuels demands for all products
based on the featured characters.  In 2004, the Company had one major theatrical
release  that  fueled  growth in its  businesses:  Spider-Man  2.  This  release
resulted in increased  awareness of this character  family,  which  subsequently
drove sales of Marvel-branded  licensed products,  published  materials and toys
based on this character.  The Company's  results are partially  dependent on the
successful  release of theatrical films and acceptance of products developed for
the characters  appearing in the films.  Marvel is also involved in the creative
direction of all entertainment projects based on its characters.

         The Company and Sony Pictures have entered into a joint venture, called
Spider-Man  Merchandising  LP (the "Joint  Venture") for the purpose of pursuing
licensing  opportunities  relating to characters based upon movies or television
shows  featuring  Spider-Man  and produced by Sony Pictures.  In May 2004,  Sony
Pictures and Marvel settled various  disputed  matters and, among other matters,
altered the distribution of net receipts of the Joint Venture effective April 1,
2004. As a result of this settlement, effective April 1, 2004, the operations of
the Joint Venture have been consolidated in the Company's consolidated financial
statements.

         The Company has  reevaluated  and revised  certain  revenue and expense
classifications  within its internal reporting of segment performance,  the same
reporting that is used by executive  management to monitor and make decisions on
operating matters.  As a result,  during the fourth quarter of 2004, the Company
began classifying  revenue from its master toy licensee,  Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment.  Previously, such revenue
and expenses were classified within the Company's  Licensing  segment.  Revenues
from TBW  reflect a broader  set of efforts on the part of the  Company  than do
revenues from the Company's other licensees. All TBW toys produced under license
from  the  Company  are  created,  designed,  marketed  and  sold for TBW by the
Company's Toy segment,  under an agency  agreement  between TBW and the Company.
This is unlike other license  arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment  involve efforts that are similar in nature to the efforts
associated  with the Company's own toys,  the Company  believes this change will
better  aggregate  the results  derived from  Marvel-branded  toys  developed by
Marvel and more clearly reflect  operating results used by management to measure
the  performance  of the Toy  operations.  The Company  also  believes  that the
classification  of earnings  from TBW will better  portray  trends in Marvel toy
brands designed and marketed by the Company. As a result of this change, segment
information for the years ended December 31, 2003 and 2002 has been reclassified
as follows:


                                       11
<PAGE>


<TABLE>
<CAPTION>
                                 Year Ended December 31, 2003                  Year Ended December 31, 2002
                           -------------- -------------- ------------    ------------- --------------- -----------
                            Previously       Reclass         As           Previously      Reclass          As
                             Reported      Adjustment     Adjusted         Reported      Adjustment     Adjusted
                           -------------- -------------- ------------    ------------- --------------- -----------
                                                               (in millions)
<S>                          <C>             <C>           <C>              <C>           <C>            <C>
Net Sales
   Licensing..........       $189.2          $ (64.8)      $124.4           $79.6         $ (21.8)       $57.8
   Toys...............         85.2             64.8        150.0           155.0            21.8        176.8
Gross Profit
   Licensing..........        189.2            (64.8)       124.4            75.1           (21.8)        53.3
   Toys...............         40.0             64.8        104.8            48.8            21.8         70.6
Selling,    General   and
  Administrative
   Licensing..........         61.1             (8.6)        52.5            19.5             -           19.5
   Toys...............         14.8              8.6         23.4            34.3             -           34.3
Operating Income
   Licensing..........        139.4            (56.2)        83.2            69.4           (21.8)        47.6
   Toys...............         21.7             56.2         77.9             8.8            21.8         30.6
</TABLE>


Licensing

         Marvel's  Licensing  segment  is  responsible  for  the  merchandising,
licensing  and  promotions  for Marvel's  characters  worldwide.  The  Licensing
segment  expanded its overseas  businesses  in 2004  through  newly  established
offices  located in London  and  Tokyo.  The  Licensing  segment  is  pursuing a
strategy of  concentrating  its licensee  relationships  in a smaller  number of
high-quality  licensees,  and negotiating higher guaranteed royalty amounts from
each licensee.  The Licensing segment is also focusing on entering into licenses
in new  product  categories,  such as the  wireless  category,  which  was first
licensed in late-2004.  The Company typically enters into multi-year merchandise
license  agreements that specify guaranteed minimum royalty payments and include
a significant  down-payment upon signing. The Company recognizes license revenue
when it satisfies the requirements of completing the earnings process,  which is
normally upon the effective date of the agreement.  The remaining balance of the
guaranteed payments, reflected as accounts receivable, is due in accordance with
the periodic schedule as specified in each agreement. If sales of the licensee's
merchandise are high enough to entitle the Company to royalties in excess of the
amount of the minimum  royalty  guarantee  (which excess  amounts are defined as
"overages"),  the  Company  receives  the  remaining  balance of the  guaranteed
payment sooner than provided for in the agreement's  payment schedule.  Overages
are not  recognized  as  revenue,  in most cases,  until the minimum  guaranteed
payments are fully collected.  Licensing fees collected in advance of the period
in which revenue would be recognized are recorded as deferred revenue.

Publishing

         Marvel's  Publishing  segment  is  in  the  process  of  expanding  its
advertising and promotions  business with an increased emphasis on custom comics
and  in-school  marketing.  The  publishing  business  will  also  continue  its
long-term focus on expanding distribution to new channels, like the mass market,
and expanding its product line to target new demographics,  although the Company
does not expect these initiatives to have a significant  impact on 2005 revenue.
Growth in 2005 is expected to come  largely  from  expansion of the core product
lines of comics  and trade  paperbacks,  and  increased  advertising  and custom
publishing sales due to the anticipated effects of future media events.

Toys

         The 2005  business  outlook for toys is closely  tied to the  scheduled
release  in  July  of the  movie  Fantastic  Four.  This  film is one of the Toy
Industry's most highly  anticipated events of 2005, and retailers have developed
strategies to fully embrace the Fantastic  Four  property.  However,  no one can
guarantee the box office success of a


                                       12
<PAGE>


movie release. In addition,  the company should benefit from continuing sales of
other brands in the Marvel Universe of characters.

         The only toys  produced  by or for the  account of the  Company  during
2002,  2003 and 2004 were (i) toys based on  Spider-Man  movies  and  television
shows  produced by Sony  Pictures,  and (ii) toys based on the Lord of the Rings
movie trilogy.

         The  Company  has  licensed  the right to make all other  toys based on
Marvel characters to licensees. TBW is the master toy license for action figures
and accessories.  Marvel does the product  development,  marketing and sales for
TBW, and the Company records income from TBW, and related  expenses,  in the Toy
segment.  All royalties received by the Company from the sales of other licensed
toys are  recorded as  royalties  in the  Company's  Licensing  segment,  as the
Company  does no product  development,  marketing,  sales or other  services for
these licensees.

     Net Sales

         The  Company's  net sales are  generated  from (i) licensing the Marvel
characters for use on merchandise,  toys, promotions,  feature films, television
programs,  theme parks and various other areas;  (ii) publishing comic books and
trade paperbacks,  including related advertising  revenues;  and (iii) marketing
and  distributing  the Company's  toys,  including,  during 2002, 2003 and 2004,
Spider-Man  Movie Toys and toys based on  characters  from the Lord of the Rings
movie trilogy,  as well as kites through the Company's Spectra Star product line
(which was closed in mid-2003).


Sales Mix by Segments:                  Years Ended December 31,
---------------------------------------------------------------------------
                                      2002           2003       2004
                                      ----           ----       ----
Licensing........................      19.3%         35.8%      41.8%
Publishing.......................      21.6%         21.1%      16.8%
Toys.............................      59.1%         43.1%      41.4%
                                       -----         -----      -----
Net Sales........................     100.0%        100.0%     100.0%
                                      ======        ======     ======

         Licensing net sales  increased in absolute  dollars and as a percentage
of net sales due to the success of consumer products licensing  surrounding 2004
movie releases,  particularly  Spider-Man 2, and continued  momentum in domestic
and  international  contract  renewals and expanded volume in new categories and
new markets. Net sales in the Toy segment increased in absolute dollars and as a
percentage  of total net sales as sales of toys based on  Spider-Man 2 increased
due to the movie's  release in June 2004. The Company expects that, in 2005, toy
revenues will decrease as a percentage of total sales and licensing  will become
the Company's top  revenue-producing  segment. This anticipated shift is because
the best  selling  Marvel toys in 2004 were  Spider-Man  movie  toys,  which are
produced  by the  Company  and for which the  entire  wholesale  sales  price is
recorded as revenues. The main toy line in 2005 is expected to be Fantastic Four
movie toys, which will be produced by TBW under its Marvel license and for which
only the royalty and service fee  percentages of the wholesale  sales price will
be recorded as revenue.  Publishing  net sales  continue to increase in absolute
dollars, but are remaining essentially flat as a percentage of total sales. This
is due to slower  sales  growth in this  segment  compared  to the growth in the
Licensing segment.

         During 2001, the Company entered into a 5 1/2-year exclusive  licensing
agreement with TBW, an unrelated Hong Kong company, for the sale and manufacture
of toy action  figures and  accessories,  and certain  other toys,  that feature
Marvel  characters  other  than  those  based upon  movies or  television  shows
featuring  Spider-Man  and  produced  by Sony  Pictures.  TBW is licensed by the
Company  to use the Toy Biz  name -- a name  also used  by the  Company  --  for
marketing  purposes,  but the Company has no ownership interest in TBW or in any
of its  affiliates,  and the Company has no financial  obligations or guarantees
related to TBW or any of its  affiliates.  The agreement  represents a strategic
decision by the Company to eliminate much of the risk and investment  previously
associated with the direct  manufacture and sale of these lines of toys while it
enabling the Company to participate in their success through  ongoing  licensing
fees. Under an agency agreement whose term is the same as the license


                                       13
<PAGE>


agreement, Marvel's Toy segment does product design, marketing and sales for TBW
with respect to Marvel-licensed toys, and receives fees for these services based
on the  wholesale  value of toys sold.  As  explained  in  "BUSINESS -- General"
above, during the fourth quarter of 2004 the Company began classifying  earnings
from TBW,  and  related  expenses,  within  its Toy  segment.  Previously,  such
revenues and expenses were included within the Company's Licensing segment.

         The  Company's  Toy segment  markets and  distributes  toys  including,
during the period covered by this report,  Spider-Man  movie toys and toys based
on the Lord of the Rings movie  trilogy.  In addition,  the Company has recently
signed  licenses to develop,  market and  distribute  toys based on the upcoming
movie and  television  show  featuring  Curious  George  (the movie  release and
television show initial broadcast are scheduled for February 2006 and Fall 2006,
respectively) and Total Nonstop Action ("TNA")  Wrestling.  Initial shipments of
these two toy lines are expected in 2005.

         An affiliate of TBW performs certain administrative oversight duties in
connection with the Company's toy  manufacturing  operations in China, for which
the Company pays a commission.

     Operating Expenses: Cost of Sales

         Licensing  Segment:  During the twelve months ended  December 31, 2002,
2003 and 2004,  there were generally no material cost of sales  associated  with
the licensing of the Company's characters.

         Publishing  Segment:  Cost of sales for comic book and trade  paperback
publishing  consists of art,  editorial,  and printing 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
contracts  the  printing  of its  comic  books to  unaffiliated  companies.  The
Company's cost of printing is subject to fluctuations in paper prices.

         Toy Segment: 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'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

         General Corporate Overhead:  Selling,  general and administrative costs
consist  primarily  of  payroll,  rent and legal  costs  associated  with active
litigation matters.

         Licensing Segment:  Selling,  general and administrative  costs consist
primarily  of payroll  and  royalties  owed to movie  studios for their share of
license  income.  The  Company  generally  pays  movie  studios  up  to  50%  of
merchandising-based  royalty  revenue from the  licensing of both  "classic" and
"movie" versions of characters featured in the film.

         Publishing Segment:  Selling,  general and administrative costs consist
primarily of payroll, distribution fees and other miscellaneous overhead costs.

         Toy  Segment:   Selling,   general  and  administrative  costs  consist
primarily of payroll,  advertising,  development  costs,  merchandise  royalties
payable to movie studios on toys based on Marvel  characters  portrayed in movie
releases,  and royalties payable on toys based on characters licensed from third
parties, such as New Line Cinema (licensor of the Lord of the Rings characters),
and on toys developed by outside inventors.

     Operating Expenses: Depreciation and Amortization

         Effective January 1, 2002, the Company adopted SFAS No. 142,  "Goodwill
and Other Intangible Assets", and accordingly no longer amortizes goodwill,  but
is subject to annual impairment tests in accordance with the statement (See Note
3 to the Consolidated Financial  Statements).  The Company's impairment reviews,
performed at December 31, 2002,  2003 and 2004,  did not result in an impairment
charge.


                                       14
<PAGE>


         Tooling,  product design and  development  and packaging  design costs,
which are attributable to the toy business, are normally amortized over the life
of the respective product.  Amortization of such costs amounted to $4.2 million,
$2.8 million and $2.6 million during 2002, 2003 and 2004, respectively.

Results of Operations of the Company

         Year ended December 31, 2004 compared with year ended December 31, 2003

Net Sales

                                          Years Ended December 31,
                                        2003        2004        Change
                                     ------------------------------------
                                            (dollars in millions)

Licensing........................        $124.4      $214.7      73%
Publishing.......................          73.3        86.0      17%
Toys.............................         149.9       212.8      42%
                                     -----------  ----------
Total............................        $347.6      $513.5      48%
                                     ===========  ==========

         The Company's  net revenue  increased  $165.9  million or 48% to $513.5
million for the year ended December 31, 2004 from $347.6  million in 2003.  This
overall  growth was driven by a  significant  increase in the  Licensing and Toy
segments.  Growth in licensing  primarily resulted from the consolidation of the
Joint  Venture  sales and  strong  growth in  international  licensing.  The Toy
segment  increase  resulted from strong sales of toys based on the  Spider-Man 2
movie,  which was  released in June 2004.  The  improvements  across the various
operating segments are detailed as follows:

         Licensing  revenue  increased by $90.3 million or 73% to $214.7 million
(from $124.4 million in the 2003 period).  Factors contributing to this increase
include the  consolidation  of the Joint  Venture,  which added $67.5 million in
sales in 2004 compared to none in 2003,  when Marvel's net share was recorded as
equity income. Another major driver was international consumer product licensing
(exclusive  of the effects of the  consolidation  of the Joint  Venture),  which
increased  $14.5  million or 100% to $28.4  million (from $13.9 million in 2003)
due to the success of international licensing offices opened early in 2004.

         Toy  segment  revenues  increased  by $62.9  million  or 42% to  $212.8
million (from $149.9  million in the 2003  period).  This increase was primarily
due to growing sales of products based upon Spider-Man 2 (released in June 2004)
which are produced by the Company  (revenues for which are recorded based on the
entire  wholesale  sales price).  This increase  offset a decline in royalty and
service  fee  income  derived  from  TBW's  sales of other  action  figures  and
accessories  based on Marvel  characters.  It is anticipated that toy sales will
decline  in 2005 as the  major  toy lines  will be based on the  Fantastic  Four
movie,  which will be produced by TBW (revenue for which is based on royalty and
service fee percentages of the wholesale sales price).

         Publishing's revenue increased by $12.7 million or 17% to $86.0 million
(from  $73.3  million in the 2003  period)  due to an increase in sales of comic
books,  advertising  income and custom  publishing  projects.  Revenue  from the
direct market  (specialty  comic retail stores)  increased $8.1 million to $60.0
million in 2004 (from  $51.9  million  in 2003) and  consists  of sales of comic
books  and  trade  paperbacks.  According  to the  publication  Comics  &  Games
Retailer,  Marvel  held an  approximate  47% share of the North  American  comic
market sold through  specialty  comic retail  stores in 2004,  compared  with an
approximate 41% share in 2003.  Advertising income increased $3.0 million or 47%
to $9.4  million in 2004 due to the  inclusion  of revenues  derived  from Cover
Concepts, an acquisition completed in December 2003.


                                       15
<PAGE>


Gross Profit

                                           Years Ended December 31,
                                     2003                   2004
                                Amount   Margin      Amount      Margin
                                ------   ------      ------      ------
                                        (dollars in millions)

Licensing................       $124.4        100%      $214.7       100%
Publishing...............         39.0         53%        49.0        57%
Toys.....................        104.8         70%        90.2        42%
                            -----------            ------------
Total....................       $268.2         77%      $353.9        69%
                            ===========            ============


         Gross profit  increased by $85.7  million to $353.9  million in 2004 as
compared to $268.2  million in 2003. The growth in Toy segment  revenues  (where
gross profit as a percentage of sales is the lowest of all the  segments),  as a
percentage of total revenues,  decreased the Company's consolidated gross profit
as a percentage of sales to 69% in 2004 from 77% in 2003.

Selling, General and Administrative Expenses

                                           Years Ended December 31,
                                     2003                   2004
                                        % of Net               % of Net
                                        --------               --------
                                Amount    Sales      Amount      Sales
                                ------    -----      ------      -----
                                        (dollars in millions)

Licensing................        $52.5         42%       $70.0        33%
Publishing...............         13.6         19%        14.1        16%
Toys.....................         23.4         16%        30.0        14%
Corporate................         19.4         N/A        28.7        N/A
                            -----------            ------------
Total....................       $108.9         31%      $142.8        28%
                            ===========            ============


         Selling,  general and  administrative  (SG&A) expenses  increased $33.9
million to $142.8  million in 2004 from $108.9  million in 2003;  however,  as a
percentage of sales, SG&A expenses  decreased to 28% in 2004 versus 31% in 2003,
as revenue  growth of 48% outpaced  the 28%  increase in SG&A.  The lower growth
rate in SG&A was  partially  the  result of minimal  growth in  royalty  expense
payable to movie  studios,  as the  royalties  related to the Joint  Venture are
reflected as minority  interest.  Included in  Corporate  SG&A is a $4.0 million
charge related to the early termination of a lease.

Equity in Net Income of Joint Venture

         For the year ended  December  31,  2004,  the Company  recognized  $8.1
million in income as compared to $10.9 million in the comparable  2003 period in
connection  with its share in the Joint  Venture.  In April  2004,  the  Company
resolved   litigation   with  Sony  and  mutually   agreed  to  restructure  its
relationship, which resulted in the consolidation of the operations of the Joint
Venture in the  Company's  Licensing  segment,  rather than  accounting  for the
Company's share of the Joint Venture's operations under the equity method.


                                       16
<PAGE>


Depreciation and Amortization

         Depreciation  and amortization  expense  decreased $0.5 million to $3.8
million in the 2004 period (from $4.3 million in the 2003 period).

Amortization of Goodwill

         During the first half of 2002,  the Company  completed the first of the
impairment  tests of  goodwill  required  under  SFAS  142,  which  was  adopted
effective  January 1, 2002.  Under such rules,  goodwill is no longer subject to
amortization  but it is reviewed for  potential  impairment,  upon  adoption and
thereafter,  annually or upon the  occurrence  of an impairment  indicator.  The
annual amortization of goodwill, which would have approximated $23.5 million, is
no longer required.  Other intangible assets continue to be amortized over their
useful lives. As a result of completing the required test, the Company  recorded
a charge  in 2002 for the  cumulative  effect  of the  accounting  change in the
amount of $4.2 million, net of $3.0 million tax,  representing the excess of the
carrying  value of the toy  merchandising  and  distribution  reporting  unit as
compared to its estimated  fair value.  At December 31, 2002, the net cumulative
effect of this change in accounting  principle was $4.2 million. At December 31,
2003 and 2004, there were no indicators of impairment.

Other Income

         Other income  increased $7.6 million to $9.0 million in the 2004 period
(from $1.4 million in the 2003 period).  This increase  resulted from  insurance
collections  totaling $5.0 million as well as $2.4 million in gains  recorded in
the Publishing segment for bankruptcy-related settlements.



Operating Income

                                            Years Ended December 31,
                                      2003                   2004
                                         % of Net               % of Net
                                         --------               --------
                                 Amount    Sales      Amount      Sales
                                 ------    -----      ------      -----
                                         (dollars in millions)

Licensing.................        $83.2         67%      $152.7        71%
Publishing................         25.5         35%        37.3        43%
Toys......................         77.9         52%        58.1        27%
Corporate.................        (19.4)        N/A       (23.7)       N/A
                             -----------            ------------
Total.....................       $167.2         48%      $224.4        44%
                             ===========            ============

         Operating  income  increased by $57.2 million to $224.4 million in 2004
as compared to $167.2 million in 2003.  The Licensing and  Publishing  segments'
operating  income and margins  increased  in 2004  compared  to 2003.  Operating
margins in the Licensing segment increased  slightly to 71% while margins in the
Publishing  segment  increased  to 43%,  which  was  partially  fueled  by gains
recorded  as other  income  in the 2004  period.  The  decrease  in Toy  segment
operating  income resulted from a shift in revenues based on royalty and service
fee  percentages of the wholesale  sales price in 2003 (related to toys based on
The Hulk,  which were produced by TBW) to toys based on the  Spider-Man 2 movie,
for which wholesale  sales are recorded as net revenues,  resulting in a decline
in Toy operating margins from 2003 to 2004. Corporate overhead increased by $4.3
million to $23.7 million in 2004.  The increase was primarily due to a charge of
$4.0 million for the early termination of a lease.



                                       17
<PAGE>


Interest expense

         Net interest expense increased $1.8 million for the year ended December
31, 2004 as compared  to 2003  primarily  due to the  accelerated  write-off  of
unamortized debt origination  costs associated with the early retirement of debt
in June 2004. Cash interest  expense  aggregated  $18.1 million during the years
ended December 31, 2003 and 2004.  Interest  income  aggregated $1.9 million and
$2.9 million during the years ended December 31, 2003 and 2004, respectively.

Income Taxes

         The Company's  effective tax rate for the twelve months ended  December
31, 2004 (31.2%) was lower than the Federal  statutory rate due primarily to the
release of valuation  allowances  related to state and local net operating  loss
carryforwards and the effects of the consolidation of the Joint Venture.  During
2004,   the  Company   completely   utilized  its  Federal  net  operating  loss
carryforwards.  The Company  retains  various state and local net operating loss
carryforwards of $336 million, which will expire in various jurisdictions in the
years 2005 through 2023. As of December 31, 2004, there is a valuation allowance
of $0.9 million  against  certain  capital loss and foreign net  operating  loss
carryforwards, as there is no assurance that such assets will be realized in the
future. The net change in the valuation allowance during the year ended December
31,  2004 was a decrease  of $6.2  million.  Based upon the  Company's  positive
operating  results and forecasts,  the valuation  allowance against deferred tax
assets for state and local net operating losses was released.

         During 2004, the Internal Revenue Service  concluded its examination of
the Company for the 1995  through 1998 years.  As  expected,  the effects of the
resulting  adjustments  were not material to the Company's  financial  position,
results of operations or cash flows.  The Company is also under  examination  by
various  state  and  local  jurisdictions,  the  results  of which  are also not
expected  to be  material  to  the  Company's  financial  position,  results  of
operations or cash flows.

         Year ended December 31, 2003 compared with year ended December 31, 2002

Net Sales

                                       Years Ended December 31,
                                              (in millions)
                                   2002         2003    Change
                                   ----         ----    ------
Licensing................         $57.7       $124.4    116%
Publishing...............          64.5         73.3     14%
Toys.....................         176.8        149.9    (15%)
                              -----------  -----------
Total....................        $299.0       $347.6     16%
                              ===========  ===========

         The  Company's  net revenue  increased  $48.6  million or 16% to $347.6
million for the year ended December 31, 2003 from $299.0  million in 2002.  This
overall  growth was driven by a significant  increase in the Licensing  segment,
which was  partially  off-set by a decline in toy revenue.  Licensing  net sales
benefited  from  growth in both the  domestic  and  international  markets.  The
changes across the various operating segments are detailed as follows:

         Licensing  revenue increased by $66.7 million or 116% to $124.4 million
(from $57.7  million in the 2002 period).  This growth  reflects the increase in
popularity of Marvel branded products,  both  domestically and  internationally.
Domestic  licensing  sales  increased $58.7 million in 2003 compared to 2002 and
international licensing sales increased $8.0 million in 2003 compared to 2002.

         Toy  segment  revenues  decreased  by $26.9  million  or 15% to  $149.9
million  (from  $176.8  million in the 2002  period).  The Toy segment  decrease
resulted  from a shift in sales from those based on Spider-Man  movie toys,  for
which the entire  wholesale  sales price is recorded as net sales, to toys based
on The Hulk and other licensed Marvel  characters,  revenues for which are based
on royalty and service fee percentages of the wholesale sales price.


                                       18
<PAGE>


         Publishing  revenue  increased by $8.8 million or 14% to $73.3  million
(from  $64.5  million in the 2002  period)  due to an increase in sales of comic
books,  advertising  income and custom  publishing  projects.  Revenue  from the
direct market  (specialty  comic retail stores)  increased $3.0 million to $51.9
million in 2003 (from  $48.9  million  in 2002) and  consists  of sales of comic
books  and  trade  paperbacks.  According  to the  publication,  Comics  & Games
Retailer,  Marvel  maintained  approximately  a 41% share of the North  American
comic market sold through  specialty  comic retail stores in both 2003 and 2002.
Advertising  income  increased  $2.1  million  or 50% to $6.4  million  in 2003,
predominantly fueled by an increase in the number of advertisers.

Gross Profit

                                           Years Ended December 31,
                                     2002                   2003
                                Amount   Margin      Amount      Margin
                                ------   ------      ------      ------
                                        (dollars in millions)

Licensing................        $53.3         92%      $124.4       100%
Publishing...............         33.0         51%        39.0        53%
Toys.....................         70.6         40%       104.8        70%
                            -----------            ------------
Total....................       $156.9         52%      $268.2        77%
                            ===========            ============


         Gross profit  increased by $111.3  million to $268.2 million in 2003 as
compared  to $156.9  million in 2002.  The  growth in  Licensing  revenues  as a
percentage  of total  revenues  (where gross profit as a percentage  of sales is
100%) increased the Company's consolidated gross profit as a percentage of sales
to 77% in 2003 from 52% in 2002.

Selling, General and Administrative Expenses

                                          Years Ended December 31,
                                    2002                   2003
                                       % of Net               % of Net
                                       --------               --------
                               Amount    Sales      Amount      Sales
                               ------    -----      ------      -----
                                       (dollars in millions)

Licensing................       $19.5         34%       $52.5        42%
Publishing...............        14.7         23%        13.6        19%
Toys.....................        34.3         19%        23.4        16%
Corporate................        17.3         N/A        19.4        N/A
                           -----------            ------------
Total....................       $85.8         29%      $108.9        31%
                           ===========            ============


         Selling,  general and administrative  ("SG&A") expenses increased $23.1
million to $108.9 million in 2003 from $85.8 million in 2002. As a percentage of
sales, SG&A expenses  increased to 31% in 2003 versus 29% in 2002, due primarily
to  increases  in studio  shares,  which are  royalties  to be shared with movie
studios.  Studio shares  increased to $39.0 million  versus $2.3 million in 2002
and were incurred in both the  Licensing and Toy segments.  SG&A expenses in the
Publishing  segment of $13.6 million were  comparable to the prior year. The Toy
segment had SG&A expenses of $23.4 million during 2003,  down from $34.3 million
in 2002 due  predominantly  to the  accelerated  write  off of $7.9  million  in
prepaid  royalties  related to the Lord of the Rings toy  license  from New Line
Cinema.


                                       19
<PAGE>


Equity in Net Income of Joint Venture

         For the year ended  December 31,  2003,  the Company  recognized  $10.9
million in income as compared to $13.8 million in the comparable  2002 period in
connection  with its  share in the Joint  Venture.  During  2003 and  2002,  the
Company accounted for the activity of the Joint Venture under the equity method.

Depreciation and Amortization

         Depreciation  and amortization  expense  decreased $1.5 million to $4.3
million in the 2003 period (from $5.8 million in the 2002 period).

Amortization of Goodwill

         During the first half of 2002,  the Company  completed the first of the
impairment  tests of  goodwill  required  under  SFAS  142,  which  was  adopted
effective  January 1, 2002.  Under such rules,  goodwill is no longer subject to
amortization  but it is reviewed for  potential  impairment,  upon  adoption and
thereafter,  annually or upon the  occurrence  of an impairment  indicator.  The
annual amortization of goodwill, which would have approximated $23.5 million, is
no longer required.  Other intangible assets continue to be amortized over their
useful lives. As a result of completing the required test, the Company  recorded
a charge  in 2002 for the  cumulative  effect  of the  accounting  change in the
amount of $4.2 million, net of $3.0 million tax,  representing the excess of the
carrying  value of the toy  merchandising  and  distribution  reporting  unit as
compared to its  estimated  fair  value.  At December  31,  2003,  there were no
indicators of impairment.

Operating Income

                                       Years Ended December 31,
                                     2002                      2003
                                        % of Net                 % of Net
                                        --------                 --------
                                Amount    Sales      Amount        Sales
                                ------    -----      ------        -----
                                        (dollars in millions)

Licensing................     $  47.6          82%     $  83.2        67%
Publishing...............        19.6          30%        25.5        35%
Toys.....................        30.6          17%        77.9        52%
Corporate................       (17.3)         N/A       (19.4)       N/A
                            -----------            ------------
Total ...................     $  80.5          27%      $167.2        48%
                            ===========            ============


         Operating  income  increased by $86.7 million to $167.2 million in 2003
as compared to $80.5 million in 2002.  Operating  margins  increased from 27% in
2002 to 48% in 2003,  predominantly  fueled  by  increases  in the Toy  segment.
Operating  margins in the  Licensing  segment  decreased  slightly  to 67% while
margins in the Publishing segment increased to 35%. The dramatic increase in the
Toy segment  operating  income resulted from strong growth in sales of movie and
classic toy lines. Corporate overhead increased by $2.1 million to $19.4 million
in 2003. The increase was predominantly the result of higher litigation accruals
in 2003 related to active litigation.

Interest Expense

         Net  interest  expense  decreased  $25.0  million  for the  year  ended
December 31, 2003 as compared to 2002 primarily due to the accelerated write-off
of deferred financing costs of $21.1 million associated with the early repayment
of the  Company's  three  year  term bank loan in 2002.  Cash  interest  expense
aggregated  $29.4 million and $18.1 million  during the years ended December 31,
2002 and 2003,  respectively.  Interest income  aggregated $0.1 million and $1.9
million during the years ended December 31, 2002 and 2003, respectively.


                                       20
<PAGE>


Income Taxes

         The Company's  effective tax rate for the year ended  December 31, 2003
(-1.3%) was lower than the Federal  statutory rate due primarily to release of a
portion of the valuation allowance against deferred tax assets applicable to the
anticipated  utilization of net operating loss ("NOL")  carryforwards  for which
benefit was not  previously  recognized.  At December 31, 2003,  the Company had
Federal NOL  carryforwards  of $40  million,  which were  scheduled to expire in
2020. All of the Company's  pre-acquisition  Federal NOLs were fully utilized by
December 31, 2003 and  therefore,  the Company's  income tax credit for the year
ended  December  31, 2003 was net of a non-cash tax  provision of $15.1  million
that reduced  goodwill and a non cash provision of $8.0 million  recorded in the
fourth  quarter,  representing  amortization  of a  portion  of  the  previously
recorded  deferred  tax asset.  The Company  was also  subject to tax in certain
state and local  jurisdictions.  The Company started to provide for income taxes
at a normal effective income tax rate  (approximately  40%) effective October 1,
2003.

         Due to the inherent  difficulty of  forecasting  certain events and the
success of certain  products  (e.g.,  release of feature films or the success of
toy  designs),  prior  to 2003  the  Company  determined  that  it did not  have
sufficient  positive evidence to recognize its deferred tax assets at such time.
However,  as a result of the income generated through September 30, 2003 and the
Company's near-term forecasts the Company determined,  as of September 30, 2003,
that it did have  sufficient  positive  evidence to  recognize  its deferred tax
assets and,  therefore,  the valuation  allowance  against Federal  deferred tax
assets  (principally  Federal  NOLs)  was  reduced.  Release  of  the  valuation
allowance  resulted in a one-time  $31.5  million  ($0.42  basic and diluted per
share  for both the three and nine  month  periods  ended  September  30,  2003)
deferred  tax  benefit,  which was fully  recognized  as a credit to income  tax
expense in the three month period ended September 30, 2003.

         During 2004, the Internal Revenue Service  concluded its examination of
the Company for the 1995  through 1998 years.  As  expected,  the effects of the
resulting  adjustments  were not material to the Company's  financial  position,
results of operations or cash flows.  The Company is also under  examination  by
various  state  and  local  jurisdictions,  the  results  of which  are also not
expected  to be  material  to  the  Company's  financial  position,  results  of
operations or cash flows.

Liquidity and Capital Resources

         The Company's  primary  sources of liquidity are its available cash and
cash  equivalents and cash flows from operations.  The Company  anticipates that
its primary uses for  liquidity  will be to conduct its business and to continue
to pursue its stock repurchase program.

         Net cash  provided by the Company's  operations  during the years ended
December 31, 2002,  2003 and 2004 were $75.0 million,  $171.0 million and $161.4
million, respectively.

         At  December  31, 2003 and 2004,  the  Company  had working  capital of
$214.2 million and $142.2 million, respectively, including cash, certificates of
deposit and commercial paper of $247.0 million and $204.8 million, respectively.

         Earlier in 2004, the Company had outstanding  senior notes due June 15,
2009,  which bore  interest at 12% per annum.  The Company  redeemed all of such
notes on June 15,  2004 with  available  cash  resources,  which  resulted  in a
non-recurring  charge of $3.2 million associated with the accelerated  write-off
of previously  unamortized  deferred financing costs, and a non-recurring charge
of $9.0  million  related  to the 6%  premium  necessitated  by the terms of the
redemption, both recorded during the second quarter of 2004.

         The  Company  maintains  a credit  facility  with HSBC Bank USA  ("HSBC
Credit Facility") to provide for a $15.0 million revolving credit facility and a
$15.0 million letter of credit  facility.  As of December 31, 2004, $0.3 million
of letters of credit were  outstanding  and there were no  borrowings  under the
HSBC revolver.  The HSBC


                                       21
<PAGE>


Credit Facility  contains  customary  event of default  provisions and covenants
restricting  the Company's  operations and  activities,  including the amount of
capital  expenditures,  and also  contains  certain  covenants  relating  to the
maintenance  of minimum  tangible net worth and minimum free cash flow. The HSBC
Credit Facility is secured by (a) a first priority  perfected lien in all of the
Company's assets other than its intellectual  property; and (b) a first priority
perfected  lien in all of the capital  stock of each of the  Company's  domestic
subsidiaries.  Borrowings would bear interest at prime or LIBOR-plus-two percent
per annum.

         On July 12, 2004,  the Company  announced a $100  million  common stock
repurchase  program.  Pursuant to the  authorization,  the  Company  may, at its
option, purchase shares of its common stock from time to time in the open market
or through privately negotiated transactions through the earlier of January 2006
or such time as $100 million of the Company's shares have been repurchased under
the program. The Company's largest stockholder, Chief Executive Officer and Vice
Chairman, Isaac Perlmutter,  and its Chief Creative Officer and the Chairman and
Chief  Executive  Officer of Marvel  Studios,  Avi Arad, have each agreed not to
sell any shares while the repurchase  program is in place.  Through December 31,
2004, the Company  repurchased  4.3 million shares of its common stock under the
repurchase program, at an aggregate purchase price of $58.0 million.

         As a result of the conclusion of the  bankruptcy  proceedings of Marvel
Entertainment  Group, Inc. in June 2004, the Company will not be required to pay
any further administration expense claims in that bankruptcy.

         Capital expenditures by the Company during the years ended December 31,
2002, 2003 and 2004 were $3.0 million, $3.5 million and $3.6 million,
respectively.

         The following table sets forth the Company's Contractual Obligations as
of December 31, 2004:


<TABLE>
<CAPTION>
          Contractual
          Obligations                                  Payments Due By Period
----------------------------------------------------------------------------------------------
<S>                             <C>         <C>           <C>          <C>           <C>
                                            Less than                                More Than
    (Amounts in thousands)        Total        1 Year       1-3 Years     4-5 Years   5 Years
----------------------------------------------------------------------------------------------
Long Term Debt Obligations      $    --     $   --        $   --       $    --      $   --
----------------------------------------------------------------------------------------------
Capital Lease Obligations            --         --            --            --          --
----------------------------------------------------------------------------------------------
Operating Lease Obligations      11,647      2,432         4,964         3,246       1,005
----------------------------------------------------------------------------------------------
Purchase Obligations                 --         --            --            --          --
----------------------------------------------------------------------------------------------
Royalty Obligations               2,750        750         1,000         1,000          --
----------------------------------------------------------------------------------------------
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP            165        165            --            --          --
----------------------------------------------------------------------------------------------
Expected pension benefit
payments                         13,441      1,246         2,456         2,530       7,209
----------------------------------------------------------------------------------------------
Total                           $28,003     $4,593        $8,420       $ 6,776      $8,214
----------------------------------------------------------------------------------------------
</TABLE>


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

         The Company believes that its available cash and cash equivalents, cash
flow from operations,  and other sources of liquidity will be sufficient for the
Company to conduct its business  and to continue to pursue its stock  repurchase
program.


                                       22
<PAGE>


Critical Accounting Policies and Estimates

General

Management's  discussion and analysis of the Company's  financial  condition and
results  of  operations  are based  upon the  Company's  consolidated  financial
statements,  which have been prepared in accordance with  accounting  principles
generally  accepted in the United  States.  Management  reviews  the  accounting
policies the Company uses in reporting its financial results on a regular basis.
The  preparation  of these  financial  statements  requires  management  to make
estimates  and  judgments  that affect the  reported  amounts of assets,  future
revenues from the Company's animated  television series,  liabilities,  revenues
and expenses and related disclosure of contingent assets and liabilities.  On an
ongoing basis,  management  evaluates its estimates,  including those related to
accounts  receivable,  inventories,  goodwill  and  intangible  assets,  prepaid
royalties,  molds,  tools and equipment  costs,  product,  package design costs,
future revenue from episodic television series,  royalty participation  expense,
income taxes,  contingencies  and litigation.  Management bases its estimates on
historical  experience and on various other  assumptions that are believed to be
reasonable  under the  circumstances,  the  results  of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Results may differ from these estimates due
to actual  outcomes  being  different from those on which  management  based its
assumptions.  These  estimates  and  judgments  are reviewed by management on an
ongoing  basis,  and by the Audit  Committee at the end of each quarter prior to
the public release of the Company's financial results.  Management believes that
the following critical accounting policies affect its more significant judgments
and estimates used in the  preparation of the Company's  consolidated  financial
statements.

Revenue Recognition

     Merchandise Sales, Sales Returns and Customer Allowances

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

     Subscription Revenues

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

     License Revenues

         Revenue from licensing of characters owned by the Company, are recorded
in accordance with guidance provided in Securities and Exchange Commission Staff
Accounting  Bulletin  No.  104  "Revenue  Recognition"  (an  amendment  of Staff
Accounting  Bulletin  No.  101  "Revenue  Recognition").  Under the  guidelines,
revenue is recognized when the earnings process is complete.  This is considered
to have occurred when persuasive  evidence of an agreement  between the customer
and the Company exists,  when the characters are made available to the licensee,
when the fee is fixed or determinable and when collection is reasonably assured.
Receivables  from licensees due more than one year beyond the balance sheet date
are  discounted to their  present  value.  Revenues  related to the licensing of
animated  television  series are recorded in accordance  with AICPA Statement of
Position 00-2,  "Accounting by Producers or  Distributors  of Films." Under this
Statement of Position,  revenue is recognized when persuasive evidence of a sale
or licensing arrangement with a customer exists, when an episode is delivered in
accordance  with the terms of the  arrangement,  when the license  period of the
arrangement  has begun and the


                                       23
<PAGE>


customer  can  begin  its  exhibition,  when the arrangement fee is fixed or
determinable, and when collection of the arrangement fee is reasonably assured.

         For licenses involving minimum payment obligations to the Company, when
the Company has  performed  its  obligations  under the  agreement,  if any, and
collection is reasonably  assured,  Staff  Accounting  Bulletin No. 104 "Revenue
Recognition"  (an  amendment  of Staff  Accounting  Bulletin  No.  101  "Revenue
Recognition") requires that revenue be recognized prior to the collection of all
amounts   ultimately  due.  The  Company's  license   agreements  often  include
nonrefundable  minimum  guaranteed  royalties  which are payable by the licensee
over the life of the  agreement.  GAAP requires  that revenue from  licensing be
recognized when  substantially all Company  obligations,  if any, are performed,
generally  at  the  inception  of  the  license,  and  reasonable  assurance  of
collectibility  is determined.  For contracts not providing  minimum  guaranteed
royalties  (e.g.,  studio  licenses),  the Company  records license revenue when
reported by such licensees (i.e.,  based upon royalties earned from the sales of
the related character-based merchandise).

         Revenue  recognized under license  agreements during the years December
31, 2002, 2003 and 2004 was generated  within the business  categories set forth
below. The table does not include revenues from TBW, as such revenue is recorded
in the Company's Toy segment.  The "Other" category  includes  licensing revenue
from domestics, collectibles and other.

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                                   (in thousands)
                                                      2002         2003        2004
                                                   -----------  -----------  ----------
<S>                                                  <C>           <C>         <C>
Apparel and Accessories........................      $ 11,346      $39,218     $78,798
Entertainment (including studios, themed.......
  attractions and electronic games)............        39,529       50,589      62,296
Toy royalties..................................         2,669       14,946      34,217
Other..........................................         4,210       19,696      39,423
                                                   -----------  -----------  ----------
Totals.........................................      $ 57,754     $124,449    $214,734
                                                   ===========  ===========  ==========
</TABLE>




Allowance for Doubtful Accounts

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

Excess and Obsolete Inventory

         The  Company  writes down excess and  obsolete  inventory  equal to the
estimated  market  value based upon  assumptions  about future  product  demand,
consumer  trends,  the success of related  feature films,  the  availability  of
alternate distribution channels and overall market conditions. If actual product
demands,  consumer  trends and market  conditions  are less favorable than those
projected by management,  additional inventory write-downs could be required. In
connection with the discontinuance of the Spectra Star product line in 2003, the
Company  recorded an additional  $2.2 million in inventory  reserves  during the
fourth quarter of 2002, reflected in the cost of sales of the Toy segment.

Molds and Tools

         Molds and tools are stated at cost less accumulated  depreciation.  The
Company  owns the  molds  and  tools  used in the  production  of the  Company's
products  by  third-party  manufacturers.   For  financial  reporting  purposes,
depreciation and amortization is computed by the  straight-line  method over the
estimated  selling life of the related


                                       24
<PAGE>


toys,  which is generally one to three years.  On an ongoing basis,  the Company
reviews the  recoverability  of the carrying  value of the molds and tools.  The
Company  considers  factors  including actual sales,  sell through at the retail
level,  the  overall  retail  environment  and  when  applicable,   the  overall
commercial  success  of  the  related  and  comparable  feature  length  movies,
television  shows and comic  books.  If the  facts and  circumstances  suggest a
change in useful  lives of the molds  and tools or  impairment  in the  carrying
value, the useful lives are adjusted and the unamortized costs are expensed.

Product and Package Design Costs

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

Goodwill and Other Intangibles

         The Company has significant goodwill and other intangible assets on its
balance  sheet,  which  resulted from the  acquisition  of Marvel  Entertainment
Group,  Inc. in 1998. The valuation and  classification  of these assets and the
assignment of useful amortization lives involves  significant  judgments and the
use of estimates.  The Company assesses the fair value and recoverability of its
long-lived  assets,  including  goodwill,   whenever  events  and  circumstances
indicate the carrying  value of an asset may not be  recoverable  from estimated
future cash flows expected to result from its use and eventual  disposition.  In
doing so, the Company  makes  assumptions  and estimates  regarding  future cash
flows  and  other  factors  to make its  determination.  The  fair  value of the
Company's  long-lived  assets and  goodwill  is  dependent  upon the  forecasted
performance of the Company's  business,  changes in the media and  entertainment
industry and the overall economic environment.  When the Company determines that
the carrying value of its intangibles  and goodwill may not be recoverable,  the
Company  measures any impairment  based upon a forecasted  discounted  cash flow
method.

         Effective  January 1, 2002, the Company adopted  Statement of Financial
Standards No. 142,  "Goodwill and Other Intangible  Assets," and was required to
analyze its goodwill for impairment  issues during the first six months of 2002,
and then on a periodic basis thereafter.  Goodwill is no longer amortized but is
subject to an annual (or under certain  circumstances more frequent)  impairment
test based on its  estimated  fair  value.  Other  intangible  assets  that meet
certain  criteria will continue to be amortized  over their useful lives and are
also subject to an impairment test based on estimated fair value. Estimated fair
value is typically  less than values based on  undiscounted  operating  earnings
because fair value  estimates  include a discount  factor in valuing future cash
flows. There are many assumptions and estimates  underlying the determination of
an impairment  loss.  Another estimate using  different,  but still  reasonable,
assumptions  could  produce  a  significantly   different   result.   Therefore,
impairment losses could be recorded in the future.  The first of such impairment
tests was  performed  during the first six months of 2002 which  resulted in the
recording of a one-time  non-cash  charge with respect to its toy  merchandising
and  distribution  reporting  unit  (See  Note 3 to the  Consolidated  Financial
Statements for further details.) The Company performed annual impairment reviews
at  December  31,  2002,  2003 and 2004,  which did not result in an  impairment
charge,  and will  perform  future  annual  reviews  as of  December  31 of each
subsequent year.

Royalties

         The  Company  regularly  reviews  the  recoverability  of  its  prepaid
royalties and minimum  guaranteed  commitments.  The Company  considers  factors
including  actual sales,  sell through at the retail level,  the overall


                                       25
<PAGE>


retail  environment  and the  overall  commercial  success  of the  related  and
comparable  feature  length  movies.  During  2002,  the  Company  reviewed  the
recoverability of prepaid royalty payments associated with the Lord of the Rings
toy license.  Due to lower than anticipated actual sales and sell through at the
retail level, in 2002, the Company  accelerated the write-off of $7.9 million in
prepaid  royalties.  These  charges are  reflected in the  selling,  general and
administrative expenses in 2002 for the Toy segment.

         The Company  also shares  revenues  with movie  studios for  characters
portrayed in theatrical releases.  Typically,  the studio is paid roughly 50% of
the total  license  income  derived from both classic and movie  licensing for a
specific  character,  in most cases net of a  distribution  fee  retained by the
Company,  and in some instances with some  adjustments  for characters that have
generated  sales prior to the  theatrical  release.  This royalty  share acts to
reduce the effective  percentage share with the studios. In 2004, 2003 and 2002,
the  Company  provided  for  $48.5  million,  $40.3  million  and $2.3  million,
respectively, for the share of royalties due to movie studios.

Accounting for Joint Venture

         The Company entered into the Joint Venture with Sony Pictures to pursue
licensing  opportunities  relating to characters based upon movies or television
shows featuring Spider-Man and produced by Sony Pictures.

         In May 2004, Sony Pictures and Marvel settled various  disputed matters
and, among other matters,  altered the distribution of net receipts of the Joint
Venture effective April 1, 2004. As a result of this settlement, effective April
1, 2004,  the  operations  of the Joint  Venture have been  consolidated  in the
accompanying consolidated financial statements. Because the Joint Venture is now
consolidated,  the  Company's  results -  effective  April 1, 2004 - include the
revenues  ($67.5  million) and expenses of the Joint  Venture for the year ended
December 31, 2004.  Minority  interest due to Sony  Pictures of $8.4 million was
recorded  to reflect  Sony  Pictures'  interest in the  operations  of the Joint
Venture  for the  nine  month  period  ended  December  31,  2004.  The  Company
distributes to Sony Pictures, on a quarterly basis, all cash received related to
Sony Pictures'  interest.  Accordingly,  minority  interest to be distributed is
included as a current liability in the accompanying  consolidated  balance sheet
as of December 31, 2004.  Prior to April 1, 2004, the Company  accounted for its
interest in the activity of the Joint Venture under the equity method.

Accounting for Stock-Based Compensation

         On December 31,  2002,  the FASB issued SFAS No. 148,  "Accounting  for
Stock-Based   Compensation  --  Transition  and   Disclosure",   which  provides
alternative  methods of  transition  to  Statement  123's  fair value  method of
accounting  for  stock-based  compensation.   SFAS  No.  148  also  amended  the
disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial
Reporting,  to  require  disclosure  in the  summary of  significant  accounting
policies  of the  effects  of an  entity's  accounting  policy  with  respect to
stock-based compensation on reported net income and earnings per share in annual
and interim statements.

         The Company accounts for its stock options under Accounting  Principles
Board Opinion No. 25, "'Accounting for Stock Issued to Employees" ("APB 25") and
related  Interpretations.  Under  APB 25,  because  the  exercise  price  of the
Company's employee stock options equals the market price of the underlying stock
on date of grant, no compensation expense is recognized. The Company has elected
to follow the disclosure-only provisions under SFAS No. 148. For the purposes of
SFAS No. 148 pro forma  disclosures,  the estimated fair value of the options is
amortized to expense over the options' vesting period.


                                       26
<PAGE>


         The Company's pro forma information follows:

<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                                      ------------------------------
                                                                                       2002       2003        2004
                                                                                       ----       ----        ----

                                                                                   (in thousands, except per share
                                                                                                data)

<S>                                                                                  <C>         <C>         <C>
 Net income, as reported........................................................     $ 22,610    $151,648    $124,877
 Net (loss) income attributable to common stock.................................      (45,522)    150,485     124,877
 Net (loss) income per share attributable to common stock -- diluted............        (0.79)       1.34        1.10
 Stock based employee compensation cost, net of tax, if FAS 123 was applied.....        3,935       6,661      10,300
 Pro forma net (loss) income....................................................       18,675     144,987     114,577
 Pro forma net (loss) income attributable to common stock.......................      (49,457)    143,824     114,577
 Pro forma net (loss) income per share attributable to common stock -- diluted..        (0.85)       1.27        1.01
</TABLE>


Commitments and Contingencies

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

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

Recent Accounting Pronouncements

         On December 16, 2004, the Financial  Accounting  Standards Board issued
SFAS No. 123 (revised 2004),  ("SFAS 123(R)"),  which is a revision of SFAS 123.
SFAS  123(R)  supersedes  APB 25, and amends  SFAS No.  95,  "Statement  of Cash
Flows".  Generally,  the  approach  in SFAS  123(R) is similar  to the  approach
described in SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees,  including grants of employee stock options,  to be recognized in the
income  statement based on their fair values.  Pro forma disclosure is no longer
an  alternative.  SFAS 123(R) must be adopted no later than July 1, 2005.  Early
adoption will be permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 123(R) on July 1, 2005, using the
modified-prospective method as proscribed in SFAS 123(R).

         As  permitted  by  SFAS  123,  the  Company   currently   accounts  for
share-based  payments to employees using APB 25's intrinsic value method and, as
such,  generally  recognizes no  compensation  cost for employee  stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have an impact
on the Company's  results of operations,  although it will have no impact on its
overall  financial  position.  While the Company  cannot  estimate  the level of
share-based payments to be issued in the future, based on the stock options that
are currently outstanding,  the Company expects that the adoption of SFAS 123(R)
will result in a $4.0 million  charge to  operations in the second half of 2005.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized
compensation  cost to be reported as a  financing  cash flow,  rather than as an
operating cash flow as required under current literature.  This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption.  While the Company cannot estimate what those amounts will be in
the future (because they depend on, among other things,  when employees exercise
stock options and the fair value of the  Company's  common stock at such dates),
the amount of operating  cash flows  recognized in prior periods for such excess
tax  deductions  was $0 in 2002 and $14.2  million and $3.6  million in 2003 and
2004, respectively.


                                       27
<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The  Company  has  operations  in Hong Kong.  In the  normal  course of
business,  the  operations  are  exposed to  fluctuations  in  currency  values.
Management believes that the impact of currency  fluctuations do not represent a
significant  risk  in  the  context  of  the  Company's  current   international
operations.  The Company  does not  generally  enter into  derivative  financial
instruments in the normal course of business,  nor are such instruments used for
speculative  purposes.  In December  2003, the Company opened offices in London,
England  and  Tokyo,  Japan,  to  expand  international  licensing.  Some of the
Company's  international  licenses are  denominated  in other  currencies  which
subjects the Company to additional currency fluctuation risks.

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


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The  financial  statements  required  by this  item,  the report of the
independent  auditors  thereon  and the  related  required  financial  statement
schedule  appear  on pages  F-2 and  following.  See the  accompanying  Index to
Financial   Statements  and  Financial  Statement  Schedule  on  page  F-1.  The
supplementary  financial  data required by Item 302 of Regulation S-K appears in
Note 11 to the December 31, 2004 Consolidated Financial Statements.

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

         Not applicable.

ITEM  9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

         Based upon their  evaluation of the Company's  disclosure  controls and
procedures  as of the  end of the  fiscal  year  covered  by  this  report,  the
Company's  Chief Executive  Officer and Chief  Financial  Officer have concluded
that such  controls and  procedures  are  effective.  There were no  significant
changes  in the  Company's  internal  controls  or in other  factors  that could
significantly  affect such  internal  controls  subsequent  to the date of their
evaluation.


Management's Annual Report on Internal Control Over Financial Reporting


         The  Company's   management  is  responsible   for   establishing   and
maintaining adequate internal control over financial reporting,  as such term is
defined in Exchange  Act Rules  13a-15(f).  Under the  supervision  and with the
participation of its management,  including its principal  executive officer and
principal  financial  officer,  the Company has  conducted an  evaluation of the
effectiveness  of its internal  control over  financial  reporting  based on the
framework in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring  Organizations  of the Treadway  Commission.  Based on the  Company's
evaluation under the framework in Internal Control -- Integrated Framework,  the
Company's   management  concluded  that  the  Company's  internal  control  over
financial  reporting was  effective as of December 31, 2004.  Ernst & Young LLP,
the registered public accounting firm which has audited the financial statements
included  in this  report,  has  issued  an  attestation  report  regarding  the
Company's management's assessment of the effectiveness of the Company's internal
control over financial  reporting as of December 31, 2004, and that  attestation
report is attached hereto.


Changes in Internal Controls Over Financial Reporting

         During  the  fourth  quarter  of 2004,  there  were no  changes  in the
Company's internal control over financial reporting that materially affected, or
are reasonably likely to materially  affect, the Company's internal control over
financial reporting.

ITEM  9B.  OTHER INFORMATION

         Not applicable.


                                       28
<PAGE>


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by Item 10 is incorporated herein by reference
to the  information  appearing  under  the  captions  "Election  of  Directors,"
"Executive  Officers," "Section 16(a) Beneficial Ownership Reporting Compliance"
and "Code of  Ethics"  (a  subsection  under  "Election  of  Directors")  in the
Company's  definitive proxy statement to be filed not later than April 30, 2005,
with the Securities and Exchange Commission.

ITEM 11. EXECUTIVE COMPENSATION

         The information required by Item 11 is incorporated herein by reference
to the information  appearing under the caption "Executive  Compensation" in the
Company's  definitive proxy statement to be filed not later than April 30, 2005,
with the Securities and Exchange Commission.

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

         The information required by Item 12 is incorporated herein by reference
to the information  appearing under the caption  "Security  Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement to
be filed not later  than  April  30,  2005,  with the  Securities  and  Exchange
Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 13 is incorporated herein by reference
to the  information  appearing  under the  caption  "Certain  Relationships  and
Related  Transactions"  in the Company's  definitive proxy statement to be filed
not later than April 30, 2005, with the Securities and Exchange Commission.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The information required by Item 14 is incorporated herein by reference
to the information  appearing under the caption  "Ratification of Appointment of
Independent Accountants" in the Company's definitive proxy statement to be filed
not later than April 30, 2005, with the Securities and Exchange Commission.

                                    PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (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 immediately below.

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


                                       29
<PAGE>


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

Exhibit No.
-----------

------------------------------------------------------------------------------------------------------------------------------------
<S>          <C>

3(i)         Restated  Certificate of Incorporation.  (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
3(ii)        Amended and Restated Bylaws, as amended through the date hereof. (Incorporated by reference to Exhibit 3(ii) of the
             Company's Annual Report on Form 10-K for the year ended December 31, 2003.)
------------------------------------------------------------------------------------------------------------------------------------
4.1          Article V of the Restated Certificate of Incorporation (see Exhibit 3(i), above), defining the rights of holders of
             Common Stock.
------------------------------------------------------------------------------------------------------------------------------------
4.2          Rights Agreement, dated as of August 22, 2000, between the Company and American Stock Transfer & Trust Company as
             Rights Agent, defining the rights of holders of Preferred Share Purchase Rights. (Incorporated by reference to
             Exhibit 4.2 of the Company's Current Report on Form 8-K dated August 22, 2000 and filed with the Securities and
             Exchange Commission on September 12, 2000.)
------------------------------------------------------------------------------------------------------------------------------------
4.3          Amendment to Rights Agreement, dated as of November 30, 2001, by and between the Company and American Stock Transfer
             & Trust Company as Rights Agent. (Incorporated by reference to Exhibit 10.9 of the Company's Current Report on Form
             8-K dated and filed with the Securities and Exchange Commission on December 4, 2001.)
------------------------------------------------------------------------------------------------------------------------------------
4.4          Amendment No. 2 to Rights Agreement, dated as of October 7, 2002, by and between the Company and American Stock
             Transfer & Trust Company as Rights Agent. (Incorporated by reference to Exhibit 10.1 of the Company's Current Report
             on Form 8-K dated October 4, 2002 and filed with the Securities and Exchange Commission on October 7, 2002.)
------------------------------------------------------------------------------------------------------------------------------------
10.1         1998 Stock Incentive Plan, as amended. (Incorporated by reference to Appendix B of the Company's Definitive Proxy
             Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 31, 2004.)*
------------------------------------------------------------------------------------------------------------------------------------
10.2         Form of Stock Option Agreement between the Company and recipients of stock option grants under the Company's 1998
             Stock Incentive Plan. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
10.3(i)      Form of Restricted Stock Agreement between the Company and recipients of restricted stock grants under the Company's
             1998 Stock Incentive Plan. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
10.3(ii)     Form of Perfomance-Based Restricted Stock Agreement between the Company and recipients of restricted stock grants
             under the Company's 1998 Stock Incentive Plan. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------

10.4         Nonqualified Stock Option Agreement, dated as of November 30, 2001, by and between the Company and Isaac Perlmutter.
             (Incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K dated and filed with the
             Securities and Exchange Commission on December 4, 2001.)
------------------------------------------------------------------------------------------------------------------------------------
10.5         Credit Agreement. dated as of November 30, 2001, by and between the Company and HSBC Bank USA. (Incorporated by
             reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated and filed with the Securities and
             Exchange Commission on December 4, 2001.)
------------------------------------------------------------------------------------------------------------------------------------

                                                                30


<PAGE>


------------------------------------------------------------------------------------------------------------------------------------
10.6         Pledge and Security Agreement, dated as of November 30, 2001, from the Company and other grantors referred to
             therein, as Grantors, to HSBC Bank USA, as administrative agent. (Incorporated by reference to Exhibit 10.2 to the
             Company's Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on December 4,
             2001.)
------------------------------------------------------------------------------------------------------------------------------------
10.7         Amendment, dated November 10, 2004, to Pledge and Security Agreement from the Company and other grantors referred to
             therein, as Grantors, to HSBC Bank USA, as administrative agent. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
10.8         Subsidiary Guaranty, dated as of November 30, 2001, in favor of HSBC Bank USA, as administrative agent. (Incorporated
             by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated and filed with the Securities and
             Exchange Commission on December 4, 2001.)
------------------------------------------------------------------------------------------------------------------------------------
10.9         Personal Guaranty by Isaac Perlmutter in favor of HSBC Bank USA, dated as of November 30, 2001. (Incorporated by
             reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated and filed with the Securities and
             Exchange Commission on December 4, 2001.)
------------------------------------------------------------------------------------------------------------------------------------
10.10        Registration Rights Agreement, dated as of October 1, 1998, by and among the Company, Dickstein & Co., L.P.,
             Dickstein Focus Fund L.P., Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and Alan Cooper as
             Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, Mark Dickstein and Elyssa Dickstein, as Trustees of the Mark and
             Elyssa Dickstein Foundation, Elyssa Dickstein, Object Trading Corp., Whippoorwill/Marvel Obligations Trust - 1997,
             and Whippoorwill Associates, Incorporated. (Incorporated by reference to Exhibit 99.5 to the Company's Current Report
             on Form 8-K/A dated and filed with the Securities and Exchange Commission on October 16, 1998.)
------------------------------------------------------------------------------------------------------------------------------------
10.11        Registration Rights Agreement, dated as of December 8, 1998, by and among the Company, Marvel Entertainment Group,
             Inc., Avi Arad, Isaac Perlmutter, Isaac Perlmutter T.A., The Laura & Isaac Perlmutter Foundation Inc., and Zib Inc.
             (Incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December
             31, 1998.)
------------------------------------------------------------------------------------------------------------------------------------
10.12        Warrant Shares Registration Right Agreement, dated as of November 30, 2001, by and between the Company and Isaac
             Perlmutter. (Incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated and filed
             with the Securities and Exchange Commission on December 4, 2001.)
------------------------------------------------------------------------------------------------------------------------------------
10.13        Sublease, dated as of June 9, 2000 between HSBC Bank USA and the Company, as amended by First Amendment to Sublease
             dated December 1, 2000. (Incorporated by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for
             the year ended December 31, 2000.)
------------------------------------------------------------------------------------------------------------------------------------
10.14        Sublease Termination Agreement dated as of December 30, 2004 between HSBC Bank USA and the Company. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
10.15        First Amendment, February 24, 2005, to Sublease Termination Agreement between HSBC Bank USA and the Company. (Filed
             herewith.)
------------------------------------------------------------------------------------------------------------------------------------
10.16        Agreement of Sublease  dated as of August 5, 2004,  by and between CIBC World  Markets  Corp.  and the Company.  (Filed
             herewith.) (Portions of this exhibit have been omitted pursuant to a request for confidential  treatment filed with the
             Securities and Exchange Commission.)
------------------------------------------------------------------------------------------------------------------------------------
10.17        Lease Agreement, dated as of February 15, 2005, by and between 417 Fifth Avenue LLC and the Company (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------

                                                                31


<PAGE>


------------------------------------------------------------------------------------------------------------------------------------
10.18        Share Disposition Agreement, dated as of July 9, 2004, between the Company and Isaac Perlmutter. (Incorporated by
             reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)
------------------------------------------------------------------------------------------------------------------------------------
10.19        Share Disposition Agreement, dated as of July 9, 2004, between the Company and Avi Arad. (Incorporated by reference
             to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)
------------------------------------------------------------------------------------------------------------------------------------
10.20        Employment Agreement, dated as of November 30, 1998, between the Company and Stan Lee. (Incorporated by reference to
             Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)*
------------------------------------------------------------------------------------------------------------------------------------
10.21        Master License Agreement, dated as of April 30, 1993, between Avi Arad & Associates and the Company. (Incorporated by
             reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1, File No 33-87268.)
------------------------------------------------------------------------------------------------------------------------------------
10.22        Employment Agreement, dated as of September 30, 1998, by and between Avi Arad and the Company. (Incorporated by
             reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998.)*
------------------------------------------------------------------------------------------------------------------------------------
10.23        Amendment to Employment Agreement with Avi Arad dated January 2001. (Incorporated by reference to Exhibit 10.14 of
             the Company's Annual Report on Form 10-K for the year ended December 31, 2001.)*
------------------------------------------------------------------------------------------------------------------------------------
10.24        Amendment to Employment Agreement with Avi Arad dated December 9, 2002. (Incorporated by reference to Exhibit 10.1 of
             the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.)*
------------------------------------------------------------------------------------------------------------------------------------
10.25        Amendment to Employment Agreement with Avi Arad dated as of May 1, 2004. (Incorporated by reference to Exhibit 10.1
             of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)*
------------------------------------------------------------------------------------------------------------------------------------
10.26        Employment  Agreement by and between the Company and Alan Fine,  dated as of August 13, 2001.  (Incorporated
             by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002.)*
------------------------------------------------------------------------------------------------------------------------------------
10.27        Amendment to Employment Agreement with Alan Fine, effective as of August 13, 2003. (Incorporated by reference to
             Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)*
------------------------------------------------------------------------------------------------------------------------------------
10.28        Employment Agreement, dated as of October 29, 1999, between the Company and Allen S. Lipson. (Incorporated by
             reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.)*
------------------------------------------------------------------------------------------------------------------------------------
10.29        Amendment No. 1 to Employment Agreement, dated as of November 21, 2002, by and between the Company and Allen S.
             Lipson. (Incorporated by reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the year ended
             December 31, 2002.)*
------------------------------------------------------------------------------------------------------------------------------------
10.30        Amended and Restated Employment Agreement, dated as of November 21, 2002, by and between the Company and Allen S.
             Lipson. (Incorporated by reference to Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year ended
             December 31, 2002.)*
------------------------------------------------------------------------------------------------------------------------------------
10.31        Employment Agreement, dated as of November 30, 2001, by and between the Company and Isaac Perlmutter. (Incorporated
             by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K dated and filed with the Securities and
             Exchange Commission on December 4, 2001.)*
------------------------------------------------------------------------------------------------------------------------------------

                                                                32


<PAGE>


------------------------------------------------------------------------------------------------------------------------------------
10.32        Amendment to Employment Agreement with Isaac Perlmutter dated as of May 1, 2004. (Incorporated by reference to
             Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)*
------------------------------------------------------------------------------------------------------------------------------------
10.33        Second Amendment to Employment Agreement with Isaac Perlmutter dated as of October 15, 2004. (Incorporated by
             reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)*
------------------------------------------------------------------------------------------------------------------------------------
10.34        Employment Agreement, dated as of August 1, 2003, by and between the Company and Timothy Rothwell. (Incorporated by
             reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.)*
------------------------------------------------------------------------------------------------------------------------------------
10.35        Employment Agreement, dated as of December 11, 2003, by and between the Company and David Maisel. (Incorporated by
             reference to Exhibit 10.37 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003.)*
------------------------------------------------------------------------------------------------------------------------------------
21           Subsidiaries of the Registrant. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
23           Consent of Independent Auditors. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
24           Power of attorney (included below the signature hereto.)
------------------------------------------------------------------------------------------------------------------------------------
31.1         Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed
             herewith.)
------------------------------------------------------------------------------------------------------------------------------------
31.2         Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed herewith.)
------------------------------------------------------------------------------------------------------------------------------------
32           Certification pursuant to Section 906 of the Sarbanes-Oxley Act. (Furnished herewith.)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Management contract or compensatory plan or arrangement.




                                   SIGNATURES


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


                                     MARVEL ENTERPRISES, INC.



                                    By:      /s/ John N. Turitzin
                                       -----------------------------------------
                                             John N. Turitzin
                                             Executive Vice President


March 8, 2005

                                       33


<PAGE>


                                POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>


Signature                                   Title                                                   Date
---------                                   -----                                                   ----

<S>                                         <C>                                                  <C>
/s/ Isaac Perlmutter                        Chief Executive Officer and                          March 8, 2005
--------------------                        Vice Chairman of the Board of Directors
Isaac Perlmutter                            (principal executive officer)

/s/ Kenneth P. West
--------------------                        Chief Financial Officer                              March 8, 2005
Kenneth P. West                             (principal financial officer)

/s/ Mark D. Plotkin
--------------------                        Chief Accounting Officer                             March 8, 2005
Mark D. Plotkin                             (principal accounting officer)

/s/ Morton E. Handel
--------------------                        Chairman of the Board of Directors                   March 8, 2005
Morton E. Handel

/s/ F. Peter Cuneo
--------------------                        Vice Chairman of the Board of Directors              March 8, 2005
F. Peter Cuneo

/s/ Avi Arad
--------------------                        Director                                             March 8, 2005
Avi Arad

/s/ Sid Ganis
--------------------                        Director                                             March 8, 2005
Sid Ganis

/s/ Richard Solar
--------------------                        Director                                             March 8, 2005
Richard Solar

/s/ James F. Halpin
--------------------                        Director                                             March 8, 2005
James F. Halpin

</TABLE>

                                       34


<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                  AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>

 Marvel Enterprises, Inc.
 ------------------------
 <S>                                                                                                         <C>
 Reports of Independent Registered Public Accounting Firm................................................    F-2
 Consolidated Balance Sheets as of December 31, 2003 and  2004...........................................    F-4
 Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004..............    F-5
 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December       F-6
     31, 2002, 2003 and 2004.............................................................................
 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003, and 2004.............    F-7
 Notes to Consolidated Financial Statements..............................................................    F-8


 Consolidated Financial Statement Schedule
 -----------------------------------------
 Schedule II-Valuation and Qualifying Accounts...........................................................   F-33

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

                                      F-1


<PAGE>


             Report of Independent Registered Public Accounting Firm


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

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Marvel
Enterprises, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of operations,  shareholders'  equity and comprehensive  income,  and
cash flows for each of the three years in the period  ended  December  31, 2004.
Our audits also include the financial  statement schedule listed in the Index at
Item 15(a).  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial   position  of  Marvel
Enterprises, Inc. at December 31, 2004 and 2003, and the consolidated results of
its  operations  and its cash  flows for each of the three  years in the  period
ended December 31, 2004, in conformity with U.S. generally  accepted  accounting
principles.  Also, in our opinion, the related consolidated  financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.

As discussed in Note 3 to the consolidated  financial statements,  on January 1,
2002, the Company adopted  Statement of Financial  Accounting  Standard No. 142,
"Goodwill and Other Intangible Assets."

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),  the  effectiveness  of  Marvel
Enterprises, Inc.'s internal control over financial reporting as of December 31,
2004,  based on criteria  established in Internal  Control-Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
and our report dated February 25, 2005 expressed an unqualified opinion thereon.



                                         /s/ Ernst & Young LLP


New York, New York
February 25, 2005

                                      F-2


<PAGE>


             Report of Independent Registered Public Accounting Firm

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

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Annual Report on Internal Control Over Financial  Reporting,  that
Marvel Enterprises,  Inc.  maintained  effective internal control over financial
reporting  as of December 31, 2004,  based on criteria  established  in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Marvel Enterprises
Inc.'s management is responsible for maintaining effective internal control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

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

In our opinion, management's assessment that Marvel Enterprises, Inc. maintained
effective internal control over financial  reporting as of December 31, 2004, is
fairly stated, in all material  respects,  based on the COSO criteria.  Also, in
our opinion,  Marvel  Enterprises,  Inc.  maintained,  in all material respects,
effective  internal  control over  financial  reporting as of December 31, 2004,
based on the COSO criteria.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Marvel  Enterprises,  Inc.  as of December  31,  2004 and 2003,  and the related
consolidated  statements of operations,  stockholders'  equity and comprehensive
income,  and cash flows for each of the three years in the period ended December
31, 2004 and our report dated February 25, 2005 expressed an unqualified opinion
thereon.


                                          /s/  Ernst & Young LLP


New York, New York
February 25, 2005

                                      F-3


<PAGE>


                            MARVEL ENTERPRISES, INC.

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                    December 31, December 31,
                                                                                        2003         2004
                                                                                    ---------------------------
                                                                                      (in thousands, except
                                                                                           share data)
<S>                                                                                    <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents.......................................................     $ 32,562     $204,790
  Certificates of deposit and commercial paper....................................      214,457            -
  Accounts receivable, net........................................................       51,820       73,576
  Inventories, net ...............................................................       12,975        6,587
  Distribution receivable from joint venture, net.................................        2,056            -
  Deferred income taxes, net......................................................       18,197        7,981
  Deferred financing costs........................................................          667            -
  Prepaid expenses and other current assets.......................................        2,273        2,734
                                                                                    ---------------------------
        Total current assets......................................................      335,007      295,668

Molds, tools and equipment, net...................................................        5,811        5,553
Product and package design costs, net ............................................        1,433        1,249
Goodwill, net ....................................................................      341,708      341,708
Accounts receivable, non-current portion..........................................       26,437       37,718
Deferred  income taxes, net ......................................................       28,246       32,583
Deferred financing costs..........................................................        2,779            -
Other assets......................................................................          436          335
                                                                                    ---------------------------

        Total assets..............................................................    $ 741,857     $714,814
                                                                                    ===========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable................................................................     $ 18,455     $  6,006
  Accrued royalties...............................................................       32,936       57,879
  Accrued expenses and other current liabilities..................................       31,442       43,962
  Minority interest to be distributed.............................................            -        8,428
  Unsecured creditors payable ....................................................        2,963            -
  Income taxes payable............................................................        4,705       10,129
    Deferred revenue .............................................................       30,308       27,033
                                                                                    ---------------------------
        Total current liabilities.................................................      120,809      153,437
Senior notes......................................................................      150,962            -
Accrued rent......................................................................          636          165
Deferred revenue, non-current portion.............................................            -       14,712
                                                                                    ---------------------------
        Total liabilities.........................................................      272,407      168,314
                                                                                    ---------------------------

Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued........            -            -
Common stock, $.01 par value, 250,000,000 shares authorized, 119,706,206 issued and
108,615,206 outstanding in 2003 and 120,442,988 issued and 105,101,788
  outstanding in 2004.............................................................        1,198        1,205
Deferred stock compensation.......................................................       (4,857)      (5,164)
Additional paid-in capital........................................................      566,908      577,169
Retained earnings (deficit).......................................................      (57,934)      66,943
Accumulated other comprehensive loss..............................................       (2,910)      (2,652)
                                                                                    ---------------------------
        Total stockholders' equity before treasury stock..........................      502,405      637,501
Treasury stock, 11,091,000 shares in 2003 and 15,341,200 shares in 2004...........      (32,955)     (91,001)
                                                                                    ---------------------------
        Total stockholders' equity ...............................................      469,450      546,500
                                                                                    ---------------------------

        Total liabilities and stockholders' equity ...............................   $  741,857     $714,814
                                                                                    ===========================
                 See Notes to Consolidated Financial Statements.

</TABLE>

                                      F-4


<PAGE>


                            MARVEL ENTERPRISES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                             Years Ended December 31,
                                                                           2002        2003         2004
                                                                       --------------------------------------
                                                                          (in thousands, except per share
                                                                                      data)

 <S>                                                                    <C>         <C>         <C>
 Net sales............................................................. $  299,046  $  347,626   $  513,468
 Cost of sales.........................................................    142,103      79,466      159,589
                                                                       --------------------------------------
 Gross profit .........................................................    156,943     268,160      353,879
 Operating expenses:
      Selling, general and administrative..............................     85,800     108,882      142,839
      Depreciation and amortization....................................      5,433       4,024        3,572
      Amortization of goodwill and other intangibles...................        339         314          211
                                                                       --------------------------------------
         Total operating expenses......................................     91,572     113,220      146,622
 Other income, net.....................................................      1,351       1,413        9,039
 Equity in net income of joint venture.................................     13,802      10,869        8,117
                                                                       --------------------------------------
 Operating income......................................................     80,524     167,222      224,413
 Interest expense......................................................     41,997      18,718       20,487
 Interest  income and other expenses, net..............................        149       1,868        2,946
                                                                       --------------------------------------
 Income before income tax expense, minority interest and cumulative
      effect of change in accounting principle.........................     38,676     150,372      206,872
 Income tax (expense) benefit..........................................    (11,902)      1,276      (64,631)
 Minority interest in consolidated joint venture.......................          -           -      (17,364)
                                                                       --------------------------------------
 Income before cumulative effect of change in accounting principle.....     26,774     151,648      124,877
 Cumulative effect of change in accounting principle, net of income
      tax benefit of $3,002............................................      4,164           -            -
                                                                       --------------------------------------
 Net income ...........................................................     22,610     151,648      124,877
 Less: preferred stock dividends.......................................     68,132       1,163           --
                                                                       --------------------------------------
 Net (loss) income attributable to common stock........................ $  (45,522) $  150,485  $   124,877
                                                                       ======================================
 Basic and diluted net (loss) income per share:
 Weighted average shares outstanding:
      Weighted average shares for basic earnings per share.............     57,771     100,355      107,173
      Effect of dilutive stock options.................................                 11,836        6,784
      Effect of dilutive preferred stock conversion....................          -       1,248            -
                                                                       --------------------------------------
 Weighted average shares for diluted earnings per share................     57,771     113,439      113,957
 Net (loss) income per share:
    Basic
      Before cumulative effect of accounting change.................... $    (0.72) $     1.50   $     1.17
      Cumulative effect of accounting change...........................      (0.07)          -           -
                                                                       --------------------------------------
                                                                        $    (0.79) $     1.50   $     1.17
                                                                       ======================================
    Diluted
      Before cumulative effect of accounting change.................... $    (0.72) $     1.34   $     1.10
      Cumulative effect of accounting change...........................      (0.07)          -         -
                                                                   .   --------------------------------------
                                                                        $    (0.79) $     1.34   $     1.10
                                                                       ======================================
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-5


<PAGE>


                            MARVEL ENTERPRISES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>

                                                                                               Accumulated
                                  Common      Common      Deferred     Additional   Retained      Other
                                   Stock      Stock        Stock        Paid-In     Earnings   Comprehensive   Treasury
                                  Shares      Amount    Compensation    Capital     (Deficit)      Loss          Stock     Total
                                -------------------------------------------------------------------------------------------------
                                                               (in thousands)

<S>                                <C>        <C>          <C>          <C>         <C>           <C>       <C>        <C>
Balance at December 31, 2001....   52,151     $  633       $   -        $238,557    $(162,897)    $(1,380)  $(32,955)  $ 41,958
Conversion of preferred stock
   to common stock..............   38,571        386           -         242,941            -           -          -    243,327
Warrants exercised..............      443          4           -              (4)           -           -          -         --
Warrants issued to
   stockholder/director.                -          -           -           2,567            -           -          -      2,567
Preferred dividends.............        -          -           -               -      (68,132)          -          -    (68,132)
Employee stock options
   exercised....................      545          5           -           1,702            -           -          -      1,707
Net income......................        -          -           -               -       22,610           -          -     22,610
Other comprehensive loss........        -          -           -               -            -      (1,168)         -     (1,168)
                                                                                                                      -----------
Comprehensive income............        -          -           -               -            -           -          -     21,442
                                -------------------------------------------------------------------------------------------------

Balance at December 31, 2002....   91,710      1,028           -         485,763     (208,419)     (2,548)   (32,955)   242,869

Conversion of preferred stock
   to common stock..............    5,251         53           -          33,890            -           -          -     33,943
Warrants exercised..............    7,280         73           -          15,148            -           -          -     15,221
Preferred dividends.............        -          -           -               -       (1,163)          -          -     (1,163)
Employee stock options
   exercised....................    4,070         41           -          12,615            -           -          -     12,656
Tax benefit of stock options
   exercised....................        -          -           -          14,189            -           -          -     14,189
Restricted stock grants.........      304          3      (5,306)          5,303            -           -          -         --
Amortization of restricted
   stock grants.................        -          -         449               -            -           -          -        449
Net income......................        -          -           -               -      151,648           -          -    151,648
Other comprehensive loss........        -          -           -               -            -        (362)         -       (362)
                                                                                                                      -----------
Comprehensive income............        -          -           -               -            -           -          -    151,286
                                -------------------------------------------------------------------------------------------------

Balance at December 31, 2003....  108,615      1,198      (4,857)        566,908      (57,934)     (2,910)   (32,955)   469,450

Employee stock options
   exercised....................      527          5           -           2,096            -           -          -      2,101
Tax benefit of stock options
   exercised....................        -          -           -           3,608            -           -          -      3,608
Restricted stock grants.........      215          2      (4,010)          4,008            -           -          -          -
Restricted stock retired........       (5)         -          72             (72)           -           -          -          -
Treasury stock..................   (4,250)         -           -               -            -           -    (58,046)   (58,046)
Amortization of restricted
   stock grants.................        -          -       3,631               -            -           -          -      3,631
Stock compensation expense......        -          -           -             621            -           -          -        621
Net income......................        -          -           -               -      124,877           -          -    124,877
Other comprehensive income......        -          -           -               -            -         258          -        258
                                                                                                                      -----------
Comprehensive income............        -          -           -               -            -           -          -    125,135
                                -------------------------------------------------------------------------------------------------

Balance at December 31, 2004....  105,102     $1,205     $(5,164)       $577,169      $66,943     $(2,652)  $(91,001)  $546,500
                                =================================================================================================
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-6


<PAGE>


                            MARVEL ENTERPRISES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                            Years Ended December 31,
                                                                          2002       2003        2004
                                                                       -----------------------------------
                                                                                (in thousands)

 <S>                                                                      <C>      <C>       <C>
 Net income...........................................................   $ 22,610  $151,648  $ 124,877
 Adjustments to reconcile net income to net cash provided by operating
 activities:
      Depreciation and amortization...................................      5,772     4,338      3,783
      Provision for doubtful accounts.................................      3,335     1,123        311
      Amortization of deferred financing charges......................     21,151       667      3,446
      Non-cash charge for compensatory stock options and restricted
         stock........................................................          -       903      4,252
      Tax benefit of stock options exercised..........................          -    14,189      3,608
      Gain from sales of fixed assets.................................          -      (118)      (754)
      Deferred income taxes...........................................     10,907   (21,382)     7,603
      Cumulative effect of change in accounting principle, net of
         income tax benefit...........................................      4,164         -          -
      Minority interest in net income of joint venture (net of
         distributions of $9,397).....................................          -         -      7,967
      Equity in net income of joint venture...........................    (13,802)  (10,869)    (8,117)
      Changes in operating assets and liabilities:
         Accounts receivable..........................................    (16,501)  (18,676)   (27,576)
         Inventories..................................................      4,880     3,061      6,388
         Distributions received from joint venture....................     10,031    16,394      3,321
         Prepaid expenses and other current assets....................      6,228     4,427        154
         Other assets.................................................         74       (36)      (110)
         Deferred revenue ............................................      4,022       867      6,063
         Income taxes payable.........................................        167     2,487      5,424
         Accounts payable, accrued expenses and other  current
            liabilities...............................................     11,948    21,928     20,743
                                                                       -----------------------------------
 Net cash provided by operating activities............................     74,986   170,951    161,383
                                                                       -----------------------------------

 Cash flow (used in) provided by investing activities:
      Cash of consolidated joint venture..............................          -         -      8,376
      Payment of administration expense claims and unsecured creditor
         claims.......................................................     (4,402)     (586)    (2,705)
      Purchases of molds, tools and equipment.........................     (2,068)   (1,712)    (2,578)
      Proceeds from sales of fixed assets.............................          -       263      1,210
      Expenditures for product and package design costs...............       (927)   (1,830)    (1,008)
      (Purchases) sales of certificates of deposit and commercial paper         -  (214,457)   214,457
      Other intangibles and acquisition consideration.................         (1)   (1,180)         -

                                                                       -----------------------------------
 Net cash (used in) provided by investing activities..................     (7,398) (219,502)   217,752
                                                                       -----------------------------------

 Cash flow (used in) provided by financing activities:
      Repurchase of senior notes......................................          -         -   (150,962)
      Purchase of treasury stock......................................          -         -    (58,046)
      Repayments of credit facility...................................    (37,000)        -          -
      Deferred financing costs........................................       (196)        -          -
      Employee stock options exercised................................      1,707    12,202      2,101
      Proceeds from exercise of stock warrants........................          -    15,221          -
                                                                       -----------------------------------
 Net cash (used in) provided by financing activities..................    (35,489)   27,423   (206,907)
                                                                       -----------------------------------
      Net increase (decrease) in cash and cash equivalents............     32,099   (21,128)   172,228
      Cash and cash equivalents at beginning of year..................     21,591    53,690     32,562
                                                                       -----------------------------------
      Cash and cash equivalents at end of year........................ $   53,690   $ 32,562  $204,790
                                                                       ===================================

 Supplemental disclosure of cash flow information:
      Interest paid ..................................................    $29,388   $ 18,116  $ 18,115
      Income taxes paid, net of refunds...............................        428      3,363    48,142
      Other non-cash transactions:
          Preferred stock dividends...................................     68,132      1,163         -
          Value of warrants issued in connection with credit
             facility.................................................      2,567         -          -

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-7


<PAGE>


                            MARVEL ENTERPRISES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2004

1.       Description of Business and Basis of Presentation

         Marvel Enterprises, Inc. and its subsidiaries (the "Company") is one of
the world's  most  prominent  character-based  entertainment  companies,  with a
proprietary library of over 5,000 characters.

         The   Company's   business  is  divided  into  three   integrated   and
complementary operating segments: its Licensing segment,  Publishing segment and
Toy segment. The Company has reevaluated and revised certain revenue and expense
classifications  within its internal reporting of segment performance,  the same
reporting that is used by executive  management to monitor and make decisions on
operating matters.  As a result,  during the fourth quarter of 2004, the Company
began classifying  revenue from its master toy licensee,  Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment.  Previously, such revenue
and expenses were classified within the Company's  Licensing  segment.  Revenues
from TBW  reflect a broader  set of efforts on the part of the  Company  than do
revenues from the Company's other licensees. All TBW toys produced under license
from  the  Company  are  created,  designed,  marketed  and  sold for TBW by the
Company's Toy segment,  under an agency  agreement  between TBW and the Company.
This is unlike other license  arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment  involve efforts that are similar in nature to the efforts
associated  with the Company's own toys,  the Company  believes this change will
better  aggregate  the results  derived from  Marvel-branded  toys  developed by
Marvel and more clearly reflect  operating results used by management to measure
the  performance  of the Toy  operations.  The Company  also  believes  that the
classification  of earnings  from TBW will better  portray  trends in Marvel toy
brands  designed  and  marketed  by the  Company.  As a result  of this  change,
prior-period  segment  information  has been  reclassified  to conform  with the
current  year  presentation.  For  financial  information  about  the  Company's
operating segments, see Note 15 to the attached financial statements.

         The Company and Sony Pictures Entertainment Inc. ("Sony Pictures") have
entered into a joint venture,  called  Spider-Man  Merchandising  LP (the "Joint
Venture"),  for the  purpose of  pursuing  licensing  opportunities  relating to
characters  based upon  movies or  television  shows  featuring  Spider-Man  and
produced by Sony  Pictures.  Effective  April 2004,  the operations of the Joint
Venture,  previously recorded under the equity method, have been consolidated in
the Company's accompanying financial statements (see Note 2).

2.       Summary of Significant Accounting Policies

Stock Split

         On February 24, 2004,  the Company  approved a 3-for-2 stock split that
was  distributed on March 26, 2004 to  stockholders of record on March 12, 2004.
All share and per  share  amounts  in the  accompanying  consolidated  financial
statements have been adjusted for this 3-for-2 common share stock split.

Reclassifications

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

Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company and its subsidiaries. Upon consolidation,  all significant inter-company
accounts and transactions are eliminated.

                                      F-8


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

2.       Summary of Significant Accounting Policies (continued)

Use of Estimates

         The  preparation of financial  statements in conformity with accounting
principles  generally accepted in the United States requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during  the  reporting  period.  The  principal  areas  of  judgment  relate  to
provisions for returns,  other sales  allowances and doubtful  accounts,  future
revenues from episodic  television  series,  the  realizability  of inventories,
goodwill  and other  intangible  assets,  and the reserve  for  minimum  royalty
guarantees and minimum advances,  deferred income tax assets,  molds,  tools and
equipment,  and product and package design costs,  the Fleer pension  liability,
litigation related accruals,  royalties payable, and forfeiture rates related to
employee stock compensation. 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.

         The Joint Venture  distributes its cash on a quarterly basis,  which is
not freely available for either Sony Pictures or the Company until  distributed.
Principally all of the cash balance of the Joint Venture at December 31, 2004 of
$30.9 million, was distributed in February 2005.

Inventories

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

Joint Venture

         The  Company  has entered  into the Joint  Venture to pursue  licensing
opportunities  relating  to  characters  based upon movies or  television  shows
featuring Spider-Man and produced by Sony Pictures.

         In May 2004, Sony Pictures and Marvel settled various  disputed matters
and, among other matters,  altered the distribution of net receipts of the Joint
Venture effective April 1, 2004. As a result of this settlement, effective April
1,  2004,  the  operations  of the  Joint  Venture  have  been  included  in the
accompanying consolidated financial statements. Because the Joint Venture is now
consolidated,  the Company's  results  include the revenues  ($67.5 million) and
expenses of the Joint Venture for the period from April 1, 2004 through December
31, 2004.  Minority  interest due to Sony Pictures of $17.4 million was recorded
to reflect Sony  Pictures'  interest in the  operations of the Joint Venture for
the nine month period ended December 31, 2004.  The Company  distributes to Sony
Pictures all cash received,  related to Sony Pictures' interest,  on a quarterly
basis. Accordingly, minority interest to be distributed is included as a current
liability  in the  accompanying  consolidated  balance  sheet as of December 31,
2004.  Prior to April 1, 2004,  the Company  accounted  for its  interest in the
activity of the Joint Venture under the equity method.

                                      F-9


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

2.       Summary of Significant Accounting Policies (continued)

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. For financial
reporting   purposes,   depreciation   and   amortization  is  computed  by  the
straight-line  method  generally over a one to three-year  period (the estimated
selling  life of  related  products)  for  molds  and  tooling  costs and over a
five-year  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.  Accumulated  depreciation  expense  related  to  molds,  tools and
equipment  was $8.6  million  and $9.9  million at  December  31, 2003 and 2004,
respectively.

Product and Package Design Costs

         Product and package  design  costs are stated at cost less  accumulated
depreciation and amortization.  The Company capitalizes costs related to product
and  package  design  when  such  products  are  determined  to be  commercially
acceptable.  Product design costs include costs  relating to the  preparation of
precise detailed  mechanical drawings and the production of sculptings and other
handcrafted  models from which  molds and dies are made.  Package  design  costs
include costs relating to art work,  modeling and printing  separations  used in
the production of packaging.  For financial reporting purposes,  amortization of
product and package  design is computed by the  straight-line  method  generally
over  a one  to  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.
Accumulated depreciation expense related to product and package design costs was
$3.8 million and $4.4 million at December 31, 2003 and 2004, respectively.

Goodwill

         Goodwill is stated at cost less  accumulated  amortization.  In January
2002, the Company adopted  Statement of Financial  Accounting  Standards No.142,
"Goodwill and Other Intangible  Assets",  ("SFAS 142"), which requires companies
to stop  amortizing  goodwill and certain  intangible  assets with an indefinite
useful life.  SFAS 142 required  that goodwill and  intangible  assets deemed to
have an indefinite  useful life be reviewed for impairment upon adoption of SFAS
142  (January 1, 2002) and  annually  thereafter  or upon the  occurrence  of an
impairment  indicator.  The  Company  performs  an annual  impairment  review at
December 31 of each year.

Long-Lived Assets

         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.

                                      F-10


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

2.       Summary of Significant Accounting Policies (continued)

Deferred Financing Costs

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

Comprehensive Income

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

Research and Development

         Research and  development  costs are charged to operations as incurred.
For the years ended December 31, 2002,  2003 and 2004,  research and development
expenses were $2.3 million, $1.5 million and $1.8 million, respectively.

Revenue Recognition

         Toy and  publishing  revenues 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.  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.

Revenue  from  licensing  of  characters  owned by the Company  are  recorded in
accordance with guidance  provided in Securities and Exchange  Commission  Staff
Accounting  Bulletin  No.  104  "Revenue  Recognition"  (an  amendment  of Staff
Accounting  Bulletin  No.  101  "Revenue  Recognition").  Under the  guidelines,
revenue is recognized when the earnings process is complete.  This is considered
to have occurred when persuasive  evidence of an agreement  between the customer
and the Company exists,  when the characters are made available to the licensee,
when the fee is fixed or determinable and when collection is reasonably assured.
Receivables  from licensees due more than one year beyond the balance sheet date
are  discounted to their  present  value.  Revenues  related to the licensing of
animated  television  series are recorded in accordance  with AICPA Statement of
Position 00-2,  "Accounting by Producers or  Distributors  of Films." Under this
Statement of Position,  revenue is recognized when persuasive evidence of a sale
or licensing arrangement with a customer exists, when an episode is delivered in
accordance  with the terms of the  arrangement,  when the license  period of the
arrangement  has begun and the  customer  can  begin  its  exhibition,  when the
arrangement fee is fixed or determinable, and when collection of the arrangement
fee is reasonably assured.

                                      F-11


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

2.       Summary of Significant Accounting Policies (continued)

         For licenses involving minimum payment obligations to the Company, when
the Company has  performed  its  obligations  under the  agreement,  if any, and
collection is reasonably  assured,  Staff  Accounting  Bulletin No. 104 requires
that revenue be recognized  prior to the  collection  of all amounts  ultimately
due. The  Company's  license  agreements  often  include  nonrefundable  minimum
guaranteed  royalties  which are  payable by the  licensee  over the life of the
agreement.  Generally accepted accounting  principles requires that revenue from
licensing be recognized when substantially all Company obligations,  if any, are
performed,  generally at the inception of the license,  and reasonable assurance
of collectibility is determined.  For contracts not providing minimum guaranteed
royalties,  the Company  records license revenue when reported by such licensees
(i.e., based upon royalties earned from the sales of the related character-based
merchandise).

Advertising Costs

         Advertising  production  costs are expensed when the  advertisement  is
first run. For the years ended December 31, 2002,  2003,  and 2004,  advertising
expenses were $5.8 million, $5.3 million and $11.4 million, respectively.

Royalties

         Minimum guaranteed royalty obligations,  as well as royalties in excess
of minimum  guarantees,  are expensed  based on sales of related  products.  The
realizability of minimum guarantees committed are evaluated by the Company based
on the projected sales of the related products.  The Company records  impairment
losses on minimum  guaranteed  royalties when events and circumstances  indicate
that the sales will not be sufficient to recover the minimum guaranteed royalty.

Income Taxes

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

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

Foreign Currency Translation

The  financial  position  and  results of all of the  Company's  operations  are
measured  using  the  U.S.  dollar  as  the  functional  currency.   Assets  and
liabilities  of foreign  subsidiaries  are  translated  at the exchange  rate in
effect  at year  end.  Income  statement  accounts  and cash  flows  of  foreign
subsidiaries  are translated at the average rate of exchange  prevailing  during
the period. Translation adjustments have not been material.

                                      F-12


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

2.       Summary of Significant Accounting Policies (continued)

Stock Based Compensation

         In  accordance  with  the  provisions  of  SFAS  148,  "Accounting  for
Stock-Based  Compensation - Transition and Disclosure" ("SFAS 148"), the Company
has  elected to  continue  to account  for its stock  options  under  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB 25") and related  interpretations,  rather  than the fair value  method of
accounting  for stock  options  under  SFAS  123,  "Accounting  for  Stock-Based
Compensation"  ("SFAS  123").  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.  For the purposes of
SFAS 148 pro forma  disclosures,  the  estimated  fair  value of the  options is
amortized to expense over the options' vesting periods.  The Company's pro forma
information follows (See Note 17):

<TABLE>
<CAPTION>

                                                                                  Years Ended December 31,
                                                                                2002        2003        2004
                                                                            --------------------------------------
                                                                            (in thousands, except per share data)

<S>                                                                           <C>          <C>         <C>
Net income, as reported.....................................................  $ 22,610     $151,648    $124,877
Net (loss) income attributable to common stock, as reported.................   (45,522)     150,485     124,877
Net (loss) income per share attributable to common stock -- diluted, as
   reported.................................................................     (0.79)        1.34        1.10
Stock based employee compensation cost, net of tax, if SFAS 123 was applied.     3,935        6,661      10,300
Pro forma net income........................................................    18,675      144,987     114,577
Pro forma net (loss) income attributable to common stock....................   (49,457)     143,824     114,577
Pro forma net (loss) income per share attributable to common stock --
   diluted .................................................................     (0.85)        1.27        1.01
</TABLE>

         The fair value for each option  grant under the stock  option plans was
estimated at the date of grant using a  Black-Scholes  option pricing model with
the following  weighted-average  assumptions  for the various  grants made.  The
weighted  average  assumptions for the 2002 grants are: risk free interest rates
ranging from 3.19% to 4.92%; no dividend yield; expected volatility of 0.83; and
expected life of 5 years. The weighted  average  assumptions for the 2003 grants
are: risk free interest  rates ranging from 2.32% to 3.43%;  no dividend  yield;
expected volatility ranging from 0.59 to 0.78; and expected life of 5 years. The
weighted  average  assumptions for the 2004 grants are: risk free interest rates
ranging from 2.81% to 3.96%; no dividend yield; expected volatility ranging from
0.48 to 0.58;  and expected life of 5 years.  The  Black-Scholes  option pricing
model was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, the option
valuation model requires the input of highly subjective assumptions. Because 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  SFAS 123 for providing  pro forma  disclosures  are not
likely to be  representative  of the  effects on  reported  net income in future
years.

                                      F-13


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

2.   Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments

         The  estimated  fair  value  of  certain  of  the  Company's  financial
instruments,  including  cash and cash  equivalents,  certificates  of  deposit,
commercial paper, current portion of accounts  receivable,  accounts payable and
accrued  expenses  approximate  their  carrying  amounts due to their short term
maturities.  The non-current portion of accounts receivable have been discounted
to their net present value, which approximates fair value.

Concentration of Risk

         Substantially  all of the  Company's toy products are  manufactured  in
China,  which subjects the Company to risks of currency  exchange  fluctuations,
transportation delays and interruptions, and political and economic disruptions.
The  Company's  ability to obtain  products  from its Chinese  manufacturers  is
dependent upon the United States' trade relationship with China.

         The Company  generally  requires all toy customers which purchase under
an FOB East Asia basis to secure  their  orders  with an  irrevocable  letter of
credit or advance  funds.  The Company's  publishing  and  licensing  activities
generally do not require  collateral  or other  security with regard to balances
due from  customers.  The Company  extends credit to its customers in the normal
course of business and performs  periodic  credit  evaluations of its customers,
maintaining  allowances  for  potential  credit  losses.  The Company  considers
concentrations  of  credit  risk in  establishing  the  allowance  for  doubtful
accounts and believes the recorded amount is adequate.

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

Income (Loss) Per Share

         In accordance with SFAS No. 128 "Earnings Per Share",  basic income per
share is computed by dividing  net income  attributable  to common  stock by the
weighted  average  number  of  shares of common  stock  outstanding  during  the
periods.  The  computation  of diluted income (loss) per share is similar to the
computation of basic income per share,  except the number of shares is increased
assuming the exercise of dilutive  stock options and warrants using the treasury
stock method and the  conversion of previously  outstanding  8% Preferred  Stock
using the if-converted  method unless the effect is anti-dilutive.  For the year
ended  December 31, 2002,  any dilution  arising from the Company's  outstanding
employee stock options and warrants as well as the assumed  conversion of the 8%
Preferred Stock was not included, as their effect would have been anti-dilutive.

Recent Accounting Pronouncements

         On December 16, 2004, the Financial  Accounting  Standards Board issued
SFAS No. 123 (revised 2004),  ("SFAS 123(R)"),  which is a revision of SFAS 123.
SFAS  123(R)  supersedes  APB 25, and amends  SFAS No.  95,  "Statement  of Cash
Flows".  Generally,  the  approach  in SFAS  123(R) is similar  to the  approach
described in SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees,  including grants of employee stock options,  to be recognized in the
income  statement based on their fair values.  Pro forma disclosure is no longer
an  alternative.  SFAS 123(R) must be adopted no later than July 1, 2005.  Early
adoption will be permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 123(R) on July 1, 2005, using the
modified-prospective method as proscribed in SFAS 123(R).

                                      F-14


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

2.       Summary of Significant Accounting Policies (continued)

         As  permitted  by  SFAS  123,  the  Company   currently   accounts  for
share-based  payments to employees using APB 25's intrinsic value method and, as
such,  generally  recognizes no  compensation  cost for employee  stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have an impact
on the Company's  results of operations,  although it will have no impact on its
overall  financial  position.  Had the  Company  adopted  SFAS  123(R)  in prior
periods,  the impact of that standard would have approximated the impact of SFAS
123 as  described  in the  disclosure  of pro forma net income and  earnings per
share above.  SFAS 123(R) also requires the benefits of tax deductions in excess
of recognized  compensation cost to be reported as a financing cash flow, rather
than as an  operating  cash flow as  required  under  current  literature.  This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after  adoption.  While the Company cannot  estimate what those
amounts will be in the future (because they depend on, among other things,  when
employees  exercise  stock  options and the fair value of the  Company's  common
stock at such dates),  the amount of operating  cash flows  recognized  in prior
periods for such excess tax deductions was $0 in 2002 and $14.2 million and $3.6
million in 2003 and 2004, respectively.

3.       Goodwill and Cumulative Effect of Change in Accounting Principle

         Effective  January 1, 2002, the Company adopted SFAS 142 which requires
companies  to stop  amortizing  goodwill and certain  intangible  assets with an
indefinite  useful life.  SFAS 142 requires that goodwill and intangible  assets
deemed  to have an  indefinite  useful  life be  reviewed  for  impairment  upon
adoption  of SFAS 142  (January  1, 2002) and  annually  thereafter  or upon the
occurrence of an impairment indicator.

         Under SFAS 142, goodwill  impairment is deemed to exist if the net book
value of a reporting  unit  exceeds its  estimated  fair  value.  The  Company's
reporting units are consistent with the operating segments identified in Note 15
to the Consolidated Financial Statements. The Company determines if the carrying
amount of goodwill is impaired based on discounted anticipated cash flows.

         Upon  adoption  of SFAS 142 in the first  quarter of 2002,  the Company
recorded a one-time, non-cash charge of $4.2 million, (net of income tax of $3.0
million) or $0.07 per share to reduce the carrying  value of its goodwill,  with
respect to its toy merchandising and distribution reporting unit. Such charge is
non-operational  in nature and is reflected as a cumulative  effect of change in
accounting  principle in the accompanying  Consolidated  Statement of Operations
for the year ended December 31, 2002.

                                      F-15


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

4.       Details of Certain Balance Sheet Accounts

<TABLE>
<CAPTION>

                                                                             December 31,
                                                                           2003       2004
                                                                        -----------------------
                                                                           (in thousands)
 <S>                                                                      <C>        <C>
 Accounts receivable, net, consists of the following:
    Toys:
      Accounts receivable..............................................   $13,149    $ 7,931
      Less allowances for:
         Doubtful accounts.............................................      (651)      (328)
         Advertising, markdowns, volume discounts and other............    (3,921)    (4,685)
                                                                        -----------------------
           Total toys..................................................     8,577      2,918
                                                                        -----------------------
    Publishing:
      Accounts receivable..............................................    17,457     19,489
      Less allowances for:
         Doubtful accounts.............................................      (221)      (105)
         Allowance for returns.........................................    (7,924)    (6,482)
                                                                        -----------------------
           Total publishing............................................     9,312     12,902
                                                                        -----------------------
    Licensing:
      Accounts receivable..............................................    38,132     62,174
       Less allowances for doubtful accounts...........................    (4,201)    (4,418)
                                                                        -----------------------
           Total licensing.............................................    33,931     57,756
                                                                        -----------------------
           Total.......................................................   $51,820    $73,576
                                                                        =======================
 Inventories, net, consists of the following:
    Toys:
      Finished goods...................................................   $ 6,560    $ 1,259
      Component parts, raw materials and work-in-process...............        79          -
                                                                        -----------------------
           Total toys..................................................     6,639      1,259
                                                                        -----------------------
    Publishing:
      Finished goods...................................................     2,053      1,775
      Editorial and raw materials......................................     4,283      3,553
                                                                        -----------------------
           Total publishing............................................     6,336      5,328
                                                                        -----------------------
           Total.......................................................   $12,975    $ 6,587
                                                                        =======================
 Accounts  receivable - licensing,  non -- current  portion  are due as
 follows:
     2005..............................................................   $15,033    $     -
     2006..............................................................     8,900     26,073
     2007..............................................................     5,375      9,910
     2008 and thereafter...............................................         -      3,700
     Discounting.......................................................    (2,871)    (1,965)
                                                                        -----------------------
           Total.......................................................   $26,437    $37,718
                                                                        =======================

 Accrued royalties consists of the following:
    Merchandise royalty obligations....................................   $ 1,574    $ 1,299
    Freelancer talent..................................................     2,360      1,382
    Movie related......................................................    29,002     55,198
                                                                        -----------------------
           Total.......................................................   $32,936    $57,879
                                                                        =======================
 Accrued expenses and other current liabilities consist of the
 following:
    Accrued advertising costs..........................................   $   608    $ 2,444
    Inventory purchases................................................     7,290      3,032
    Bonuses............................................................     4,074      5,545
    Accrued expenses -- Fleer sale (principally pension benefits)......     5,234      6,538
    Litigation accruals................................................     2,719      8,989
    Administration expense claims payable..............................       788         50
    Donation...........................................................     2,000      1,333
    Interest...........................................................     1,079          -
    Other accrued expenses.............................................     7,650     16,031
                                                                        -----------------------
           Total.......................................................   $31,442    $43,962
                                                                        =======================
</TABLE>

                                      F-16


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004
5.       Debt Financing

         On February 25, 1999, the Company  completed a $250.0 million  offering
of senior notes (the "Senior Notes"). The Senior Notes were due on June 15, 2009
and bore  interest  at 12% per  annum  payable  semi-annually  on June  15th and
December  15th.  The  Company  redeemed  all of such notes on June 15, 2004 with
available  cash  resources,  which  resulted in a  non-recurring  charge of $3.2
million  associated  with the  accelerated  write-off of previously  unamortized
deferred financing costs, and a non-recurring  charge of $9.0 million related to
the 6% premium necessitated by the terms of the redemption.

         On November  30,  2001,  the Company and HSBC Bank USA entered  into an
agreement for a senior credit facility (the "HSBC Credit Facility") comprised of
a $20.0 million revolving letter of credit facility renewable annually for up to
three years and a $37.0  million term loan  facility,  which was used to finance
the  repurchase of a portion of the Company's  Senior Notes.  The term loan bore
interest at the lender's  reserve  adjusted LIBOR rate plus a margin of 3.5%. In
2002,  the Company  prepaid $32.4  million of the term loan. In connection  with
this early  repayment of the term loan,  the Company  recorded a charge of $11.8
million for the  write-off  of a  proportionate  share of  unamortized  deferred
financing costs associated with the facility.

         On December 18, 2002, the Company  amended the HSBC Credit  Facility to
provide for a $15.0 million revolving credit facility and a $15.0 million letter
of credit facility. The HSBC Credit Facility contains customary event of default
provisions and covenants  restricting  the Company's  operations and activities,
including  the  amount  of  capital  expenditures,  and  also  contains  certain
covenants  relating to the maintenance of minimum tangible net worth and minimum
free cash flow.  The HSBC  Credit  Facility  is secured by (a) a first  priority
perfected  lien in all of the  Company's  assets  other  than  its  intellectual
property; and (b) a first priority perfected lien in all of the capital stock of
each of the Company's domestic  subsidiaries.  Borrowings would bear interest at
prime or LIBOR-plus-2 per cent per annum. As of December 31, 2004, there were no
borrowings  under the HSBC  revolver  and $0.3 million of letters of credit were
outstanding.

         In  consideration  for the HSBC Credit  Facility,  the  Company  issued
warrants to HSBC to  purchase up to  1,125,000  shares of the  Company's  common
stock.  These  warrants had an exercise price of $2.41 and a life of five years.
The fair value for the  warrants was recorded as deferred  financing  costs.  In
December 2002, HSBC exercised  750,000  warrants and received  442,665 shares of
common  stock under a Cashless  Exercise  Ratio  provision of the  warrants.  In
February 2003, HSBC exercised all of its remaining warrants.

In connection with the HSBC Credit  Facility,  the Company and Isaac  Perlmutter
entered into a Guaranty and Security Agreement ("Security Agreement"). Under the
terms  of the  Guaranty,  Mr.  Perlmutter  has  guaranteed  the  payment  of the
Company's  obligations  under the HSBC Credit Facility in an amount equal to 25%
of all  principal  obligations  relating  to the HSBC  Credit  Facility  plus an
amount, not to exceed $10.0 million,  equal to the difference between the amount
required to be in the cash  reserve  account  maintained  by the Company and the
actual amount on deposit in such cash reserve  account at the end of each fiscal
quarter;  provided that the aggregate amount  guaranteed by Mr.  Perlmutter will
not  exceed  $30.0  million.  Under the  terms of the  Security  Agreement,  Mr.
Perlmutter  has provided the  creditors  under the HSBC Credit  Facility  with a
security interest in the following types of property, whether currently owned or
subsequently  acquired by him: all promissory  notes,  certificates  of deposit,
deposit  accounts,  checks and other  instruments  and all  insurance or similar
payments or any  indemnity  payable by reason of loss or damage to or  otherwise
with respect to any such property. This guaranty continues with the current HSBC
revolving and letter of credit facilities.

                                      F-17


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

5.       Debt Financing (continued)

         In  consideration  for the Security  Agreement,  the Company issued Mr.
Perlmutter 6,904,964 warrants. These warrants had an exercise price of $2.07 and
a life of five years. The aggregate value of the exercisable  warrants was $13.0
million and were recorded as deferred  financing costs. Due to the prepayment of
the Company's term loan, all related deferred  financing  costs,  have initially
been  amortized  over the initial  three year term of the HSBC  Credit  Facility
using the  effective  interest  method and were  subsequently  written off on an
accelerated  basis as of December 31, 2002.  During 2003,  all of such  warrants
were exercised.

6.       8%   Cumulative   Convertible    Exchangeable   Preferred   Stock   and
         Stockholders' Equity

         Each  share of the 8%  cumulative  convertible  exchangeable  preferred
stock (the "8%  Preferred  Stock")  was  convertible  into 1.559  fully paid and
non-assessable  shares of common stock of the Company. On November 18, 2002, the
Company  completed an Exchange Offer whereby 17.6 million shares (85%) of its 8%
Preferred  Stock were tendered in exchange for 36.8 million shares of its common
stock  utilizing  a  2.085  exchange  rate - or a  premium  of .526  shares.  In
connection  with the Exchange Offer,  the Company  recorded a non-cash charge of
$55.3 million  (representing the fair value of the additional common shares (the
premium)  issued in the  Exchange  Offer) as a preferred  dividend in the fourth
quarter  of 2002,  in  accordance  with  SFAS No.  84,  "Induced  Conversion  of
Convertible Debt." On March 31, June 30, September 30 and December 31, 2002, the
Company issued 413,067, 400,538, 407,971 and 64,239 shares, respectively,  of 8%
Preferred Stock in payment of dividends  declared and payable to stockholders of
record on those  dates.  Conversions  of  preferred  shares into  common  shares
totaled 28,207,683 during the year ended December 31, 2002.

         On March 30, 2003,  the Company  converted  all  remaining  outstanding
shares of its 8% Preferred Stock (3.3 million  shares) at the stated  conversion
rate of  1.559  shares  of the  Company's  common  stock  per  each  share of 8%
Preferred  Stock.  The  shares of  common  stock  were  issued  pursuant  to the
exemption from the registration requirements of the Securities Act of 1933 under
Section 3(a)(9) of that act.

         Under the terms of the 8%  Preferred  Stock,  the  Company  was able to
force the conversion of all  outstanding  shares of 8% Preferred Stock following
the completion of 10 consecutive  trading days on which the closing price of the
Company's common stock exceeded $7.70 per share;  March 18, 2003 marked the 10th
consecutive  trading day on which the Company's common stock's closing price met
this criterion.  During the three month period ended March 30, 2003, the Company
issued 5.3 million  shares of common  stock in the  conversion.  The  conversion
increased  the trading  float and  liquidity of the  Company's  common stock and
extinguished  the  Company's  obligation  to redeem any  remaining  shares of 8%
Preferred Stock for $6.67 per share in cash in 2011.

7.       Stock Compensation Plan

         Under the terms of the Company's  1998 Stock  Incentive Plan (the "1998
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.  Under the 1998  Plan,  24.0  million  shares,  including  options
described below, may be the subject of awards,  and up to 6.0 million shares may
be the subject of awards granted to any individual during any calendar year.

                                      F-18


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

7.   Stock Compensation Plans (continued)

         Information with respect to options issued under the 1998 Plan are as
follows:

                                                                  Weighted
                                                                   Average
                                                                  Exercise
                                                      Shares        Price
                                                -------------------------------

 Outstanding at January 1, 2002...............    14,891,312      $   3.07
    Canceled..................................      (426,312)     $   4.17
    Exercised.................................      (545,748)     $   3.13
    Granted...................................     2,563,501      $   4.90
                                                ---------------
 Outstanding at December 31, 2002.............    16,482,753      $   3.33
    Canceled..................................      (104,216)     $   6.36
    Exercised.................................    (4,068,561)     $   3.00
    Granted...................................     2,315,438      $  13.69
                                                ---------------
 Outstanding at December 31, 2003.............    14,625,414      $   5.04
    Canceled..................................      (281,466)     $  12.43
    Exercised.................................      (527,202)     $   3.99
    Granted...................................     1,333,500      $  23.29
                                                ---------------
 Outstanding at December 31, 2004.............    15,150,246      $   6.55
                                                ===============


         Stock options outstanding at December 31, 2004 are summarized as
follows:

<TABLE>
<CAPTION>

                                                 Weighted
                                                 Average          Weighted                            Weighted
                              Outstanding        Remaining        Average         Exercisable          Average
           Range of           Options at        Contractual       Exercise             at             Exercise
       Exercise Prices     December 31, 2004   Life -- (Years)     Price       December 31, 2004        Price
     --------------------------------------------------------------------------------------------------------------

       <S>                     <C>                  <C>            <C>              <C>                <C>
        $1.59 - $3.25          6,317,144            3.12           $ 2.38           6,302,140           $ 2.38
        $3.29 - $6.61          5,452,915            5.50           $ 4.67           4,787,473           $ 4.59
        $6.69 - $11.63         1,076,750            8.27           $ 9.21             382,247           $ 9.52
       $15.42 - $21.50         1,803,437            5.53           $ 18.74            652,435          $ 19.17
       $25.00 - $35.00           500,000            4.34           $ 30.00            500,000          $ 30.00
</TABLE>


         At December 31, 2002, 2003 and 2004, there were 13,211,499,  11,280,056
and 12,624,295  exercisable  options with a weighted  average  exercise price of
$3.12, $3.82 and $5.40, respectively.

         Options  granted  under  the 1998 Plan vest  generally  in three  equal
installments  beginning 12 months after the date of grant. At December 31, 2004,
2,819,438  shares were  available  for future  grants of options and rights.  At
December  31, 2004,  the  weighted  average  remaining  contractual  life of the
options outstanding is 4.67 years.

                                      F-19


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

7.       Stock Compensation Plans (continued)

         On November 30, 2001,  the Company  entered into a six year  employment
agreement with Mr. Perlmutter.  The agreement, among other things provides for a
minimal  salary and six year options to purchase  5,925,000  common  shares at a
price of $2.41 per share.  The  options  may be  exercised  at any time.  Shares
obtained  upon the  exercise of options are  restricted  shares until they fully
vest.  The vesting  period for the shares is one third on the fourth,  fifth and
sixth anniversary of the agreement.  At December 31, 2004, all 5,925,000 options
remain unexercised.

         Information with respect to restricted stock issued under the 1998 Plan
are as follows:


                                                           Shares
                                                     -------------------

    Granted during 2003..............................       304,628
    Forfeited during 2003............................             -
                                                     -------------------
 Outstanding at December 31, 2003....................       304,628
    Granted during 2004..............................       214,800
    Forfeited during 2004............................        (5,289)
                                                     -------------------
 Outstanding at December 31, 2004....................       514,139
                                                     ===================


         Restricted  stock  granted by the Company  generally  vests between the
second and the third  anniversary  date of the grant provided that the recipient
is still employed by the Company.  The aggregate  market value of the restricted
stock at the dates of issuance of $5.3  million in 2003 and $4.0 million in 2004
has  been   recorded  as  deferred   compensation,   a  separate   component  of
stockholders' equity, and is being amortized over the vesting period.

         Among the 2003 grants of restricted stock was a grant of 150,000 shares
to the  Company's  Chairman.  Such grant  vests over a  five-year  period - with
one-half of such vesting in March 2005.

         As of December  31,  2004,  the Company had  reserved  shares of common
stock for issuance as follows:

               Issuance of restricted stock................       514,139
               Exercise of common stock options............    17,455,588
                                                            ---------------
               Total.......................................    17,969,727
                                                            ===============

                                      F-20


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

8.       Sales to Major Customers and International Operations

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

         During the year ended  December 31, 2002,  the Company's  largest three
customers  accounted for approximately 15%, 9% and 4% of total net sales. During
the year  ended  December  31,  2003,  the  Company's  largest  three  customers
accounted for approximately  15%, 7% and 4% of total net sales.  During the year
ended December 31, 2004,  the Company's  largest three  customers  accounted for
approximately  13%,  12% and 4% of total  net  sales.  Additionally,  net  sales
included  license  royalty  income and toy service fees  (classified  in the Toy
segment) from Toy Biz Worldwide, Ltd. ("TBW") (see Note 9) during 2002, 2003 and
2004 aggregated $21.8 million, $64.8 million and $15.2 million, respectively.

         The Company's wholly-owned Hong Kong subsidiary supervises, with agency
support and other duties from TBW, 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 and
other cash instruments. During the years ended December 31, 2002, 2003, and 2004
international sales were approximately 23%, 24%, and 35%, respectively, of total
net toy sales. During the years ended December 31, 2002, 2003, and 2004 the Hong
Kong operations  reported  operating income (loss) of  approximately  ($28,000),
$2,536,000  and  $6,336,000  and income  before  income  taxes of  approximately
$3,000, $2,536,000 and $6,362,000,  respectively. At December 31, 2003 and 2004,
the Company had assets in Hong Kong of approximately  $7,191,000 and $5,530,000,
respectively, excluding amounts due from the Company. The Hong Kong subsidiary's
retained  earnings were  $47,116,000  and  $52,365,000  at December 31, 2003 and
2004,  respectively.  Repatriation  of such  earnings to the United States would
bear nominal income taxes, if any.

9.       Toy Licenses

         During  2001,  the Company  entered  into a license  agreement  with an
unrelated  Hong Kong  company,  TBW,  covering the  manufacture  and sale of toy
action figures and accessories of all Marvel  characters  other than those based
upon  movies or  television  shows  featuring  Spider-Man  and  produced by Sony
Pictures.  TBW opted to use the Toy Biz name for marketing purposes,  but Marvel
has neither an  ownership in TBW nor any  financial  obligations  or  guarantees
related to TBW. The license agreement has a term of 5 1/2 years and included the
payment  to Marvel of a royalty  advance  of $20.0  million.  In  addition,  the
Company and TBW have  entered  into other  agreements  which  require  Marvel to
provide TBW with certain  administrative  and  management  support for which TBW
reimburses  Marvel.  Such  reimbursements  have been  classified  as service fee
income in the  accompanying  financial  statements.  Additionally,  TBW provided
certain administrative oversight functions on behalf of the Company and received
commissions  of $0.6 million in 2002 and 2003,  and $0.2 million in 2004.  As of
December 31, 2002, the Company had  recognized  the total $20.0 million  advance
into  revenue.  During the years ended  December  31, 2002,  2003 and 2004,  the
Company  earned  royalties from TBW of $10.5  million,  $29.6 million,  and $9.3
million,  respectively,  from TBW's sale of Marvel related toy products licensed
to TBW.  Additionally,  the Company  earned service fee income from TBW of $35.2
million in 2003 and $5.9 million in 2004 in exchange for design,  marketing  and
sales  services  performed by the Company.  Through  December  2002, the Company
received a service fee based on TBW's  profits,  which amounted to $11.3 million
in 2002.

                                      F-21


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

9.   Toy Licenses (continued)

         During  2001,  the  Company   entered  into  a  license   agreement  to
manufacture  and  distribute  a line of toys  based  on the  Lord of the  Rings'
characters.  This agreement requires minimum royalty payments to New Line Cinema
over the  three  year  term of $15.0  million,  all of which had been paid as of
December 31, 2003.  Through  December 31, 2002,  2003 and 2004,  the Company has
cumulatively   recognized  $11.9  million,  $14.4  million  and  $15.0  million,
respectively,  classified  as  selling,  general  and  administrative  expenses,
associated with this license agreement. Under the present agreement, the Company
may continue to sell Lord of the Rings toys through December 31, 2005.

         In  addition  to toys based on movies  and  television  shows  based on
Spider-Man  and produced by Sony Pictures,  the Company  continues to distribute
toys based on characters  from the Lord of the Rings.  These  operations are not
affected by the license and other arrangements with TBW.


10.      Income Taxes

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

<TABLE>
<CAPTION>

                                                                              Years ended December 31,
                                                                   ------------- -- ------------- -- -------------
                                                                       2002             2003             2004
                                                                   -------------    -------------    -------------
                                                                                   (in thousands)
      <S>                                                            <C>             <C>              <C>
       Current:
                Federal.......................................       $      -        $    4,121       $   51,514
                State and local...............................            590             1,886            2,397
                Foreign.......................................            405             1,095            3,117
                                                                   -------------    -------------    -------------
                                                                          995             7,102           57,028
                                                                   -------------    -------------    -------------
       Deferred:
                Federal.......................................         10,907             5,711           12,097
                State and local...............................              -           (14,089)          (4,494)
                                                                   -------------    -------------    -------------
                                                                       10,907            (8,378)           7,603
                                                                   -------------    -------------    -------------

       Income tax expense (benefit)...........................       $ 11,902        $   (1,276)      $   64,631
                                                                   =============    =============    =============
</TABLE>

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

<TABLE>
<CAPTION>

                                                                                  Years ended December 31,
                                                                         --------------------------------------------
                                                                            2002            2003             2004
                                                                         -----------     ------------     -----------
        <S>                                                                 <C>           <C>               <C>
        Federal income tax provision computed at the statutory rate....     35.0%           35.0%            35.0%
        State and local taxes, net of Federal income tax benefit.......      0.6%            1.0%             1.9%
        Joint venture minority interest................................        -               -             (2.9)%
        Valuation allowance............................................        -           (38.2)%           (3.0)%
        Foreign taxes..................................................      1.0%            0.4%            (0.5)%
        Purchase accounting............................................     (5.6)%             -                -
        Other..........................................................     (0.2)%           1.0%             0.7%
                                                                         -----------     ------------     -----------
        Total provision for income taxes...............................     30.8%           (0.8)%           31.2%
                                                                         ===========     ============     ===========
</TABLE>

                                      F-22


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

10.  Income Taxes (continued)

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

<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                             -------------------------------
                                                                                 2003              2004
                                                                             -------------     -------------
                                                                                     (in thousands)
        <S>                                                                   <C>               <C>
        Deferred tax assets:
                 Accounts receivable....................................      $     304         $     150
                 Inventory..............................................          2,079             1,010
                 Depreciation/ amortization.............................          1,077             1,025
                 Sales reserves.........................................          2,322             1,541
                 Employment reserves....................................            464             2,386
                 Minimum pension liability..............................              -             1,558
                 Other reserves.........................................          3,420            11,234
                 Net operating loss carryforwards.......................         45,018            28,938
                 Tax credit carryforwards...............................          4,561                 -
                 Other..................................................            720               493
                                                                             -------------     -------------
                 Total gross deferred tax assets........................         59,965            48,335
                 Less valuation allowance...............................         (7,037)             (887)
                                                                             -------------     -------------
                 Net deferred tax assets................................         52,928            47,448
                                                                             -------------     -------------
        Deferred tax liabilities:
                 Joint venture interest.................................            750                 0
                 Unremitted foreign earnings............................              0               386
                 Licensing, net.........................................          5,735             6,498
                                                                             -------------     -------------
                 Total gross deferred tax liabilities...................          6,485             6,884
                                                                             -------------     -------------
        Net deferred tax asset .........................................      $  46,443         $  40,564
                                                                             =============     =============
</TABLE>

         During 2004, the Company completely  utilized its Federal net operating
loss  carryforwards.  The Company  retains various state and local net operating
loss carryforwards of $336 million,  which will expire in various  jurisdictions
in the years 2005 through  2023.  As of December 31, 2004,  there is a valuation
allowance of $0.9 million against certain capital loss and foreign net operating
loss  carryforwards,  as there is no assurance that such assets will be realized
in the future.  The net change in the valuation  allowance during the year ended
December  31,  2004 was a decrease  of $6.2  million.  Based upon the  Company's
positive  operating  results and  forecasts,  the  valuation  allowance  against
deferred tax assets for state and local net operating losses was released.

         During 2004, the Internal Revenue Service  concluded its examination of
the Company for the 1995  through 1998 years.  As  expected,  the effects of the
adjustments were not material to the Company's  financial  position,  results of
operations or cash flows. The Company is also under examination by various state
and  local  jurisdictions,  the  results  of which are also not  expected  to be
material to the  Company's  financial  position,  results of  operations or cash
flows.

                                      F-23


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

11.      Quarterly Financial Data (Unaudited)

Summarized quarterly financial information for the years ended December 31, 2003
and 2004 is as follows:

<TABLE>
<CAPTION>

                                                             2003                                         2004

             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............................  $ 87,377  $ 89,966    $ 84,536     $ 85,747    $122,326  $155,467   $135,183    $100,492
Gross profit.........................    67,093    72,824      64,328       63,915      81,803    92,607     96,865      82,604
Net income...........................    42,221    32,753      63,178       13,496      31,270    29,131     34,352      30,124
Preferred dividend requirement.......     1,163         -           -            -           -         -          -           -
Net income attributable to common
   stock.............................    41,058    32,753      63,178       13,496      31,270    29,131     34,352      30,124
Basic net income per common share
   before extraordinary gain and
   cumulative effect of change in
   accounting principle..............  $   0.45  $   0.33    $   0.62     $   0.13    $   0.29  $   0.27   $   0.32    $   0.29
Dilutive net income per common share
   before extraordinary gain and
   cumulative effect of change in
   accounting principle..............  $   0.38  $   0.28    $   0.57     $   0.12    $   0.27  $   0.25   $   0.30    $   0.27
</TABLE>

         *Quarterly  financial  data for the quarter  ended September  30, 2003
         include a tax benefit of $31.5 million  associated  with the release of
         the valuation allowance for deferred tax assets.

         **Quarterly  financial  data for the quarter  ended  December  31, 2004
         include  a  charge  to   operations  of  $4.0  million  for  the  early
         termination  of a lease and a tax  benefit of $6.2  million  associated
         with the release of the valuation allowance for deferred tax assets.

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

12.      Related Party Transactions

         An affiliate of the Company,  which is wholly-owned by Mr.  Perlmutter,
CEO and a major  stockholder,  acts as the Company's media consultant in placing
the Company's advertising and receives certain fees and commissions based on the
cost of the placement of such  advertising.  During the years ended December 31,
2002,  2003,  and 2004,  the Company paid fees and  commissions to the affiliate
totaling approximately $102,000, $157,000 and $330,000,  respectively,  relating
to such advertisements.

         The Company shares office space and certain general and  administrative
costs with the  aforementioned  affiliate.  Rent allocated to this affiliate for
the years ended  December 31,  2002,  2003 and 2004 was  approximately  $83,000,
$87,000 and $85,000,  respectively.  While certain costs are not allocated among
the  entities,  the Company  believes that it bears its  proportionate  share of
these costs.

                                      F-24


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

12.  Related Party Transactions (continued)

         Avi Arad, an officer, member of the Board of Directors, and stockholder
is paid  royalties for toys he invented or designed of  approximately  $684,000,
$867,000 and $850,000 during the years ended December 31, 2002,  2003, and 2004,
respectively.   In  addition,  an  entity  wholly-owned  by  Mr.  Arad  provides
production services in connection with the Company's animated television series.
During the years ended  December  31,  2002,  2003 and 2004,  the  Company  paid
production  fees to this  affiliate  of  approximately  $300,000,  $628,000  and
$280,000,  respectively.  At  December  31,  2003 and 2004,  the  Company had an
obligation to Mr. Arad of approximately $213,000 for unpaid royalties.

         The Company paid producer fees in regard to certain  television  series
to a Company  wholly  owned by a former  officer and  employee of  approximately
$202,000  and  $141,000  during  the years  ended  December  31,  2002 and 2003,
respectively.  This  arrangement  terminated  in October,  2003 and there are no
further obligations.

13.      Commitments and Contingencies

         In June 2000, the Company entered into a lease agreement, as amended on
December 31, 2004, for a corporate office facility.  The lease term commenced in
April 2001 and terminates on May 31, 2005. Approximately,  $4.4 million of lease
payments  are  guaranteed  by Mr.  Perlmutter.  Rent  expense  amounted  to $3.2
million,  $3.2 million and $7.3  million for the years ended  December 31, 2002,
2003 and 2004,  respectively.  During  December 2004, the Company entered into a
lease amendment to effect the early termination of the lease,  which generated a
fourth  quarter  charge to  operations  of $4.0  million.  This  charge has been
included in selling,  general and  administrative  expenses in the  accompanying
2004 consolidated  statement of income. In August 2004, the Company entered into
a lease agreement for new corporate  office space.  The lease term will commence
on March 1, 2005 and terminate on September 29, 2011.

         Minimum rental  payments under  non-cancelable  operating  leases as of
December 31, 2004 are as follows:

Year ending December 31:
         2005..........................................       $  2,431
         2006..........................................          1,603
         2007..........................................          1,621
         2008..........................................          1,740
         2009..........................................          1,765
Thereafter.............................................          2,487
                                                            -------------
Total..................................................       $ 11,647
                                                            =============


         The  following  table  sets  forth  the  Company's  other   contractual
obligations as of December 31, 2004:

<TABLE>
<CAPTION>

              Contractual Obligations                                   Payments Due By Period
                                                    ----------------------------------------------------------------
                                                                 Less than                             More than
               (Amounts in thousands)                  Total       1 Year     1-3 Years   3-5 Years     5 Years
                                                    ----------------------------------------------------------------

<S>                                                       <C>          <C>       <C>          <C>          <C>
Royalty Obligations................................   $   2,750   $    750    $  1,000     $  1,000     $
Other Long-Term Liabilities Reflected on the
   Company's Balance Sheet under GAAP..............         165        165          --           --           --
Expected pension benefit payments..................      13,441      1,246       2,456        2,530        7,209
                                                    ----------------------------------------------------------------
Total..............................................   $  16,356   $  2,161    $  3,456     $  3,530     $  7,209
                                                    ================================================================
</TABLE>

                                      F-25


<PAGE>



                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

13.  Commitments and Contingencies (continued)

         The Company is a party to a lease  agreement for a public  warehouse in
Fife, Washington.  The lease payments associated with this warehouse,  which are
estimated to average between  $120,000 and $150,000 per year, are based on cubic
feet,  measured  monthly,  and are subject to change  depending  on the capacity
devoted to the inventory stored at this location.

         The  following  table  sets  forth  the  Company's   other   commercial
commitments as of December 31, 2004:

<TABLE>
<CAPTION>

        Other Commercial                                     Amount of Commitment
          Commitments                                       Expiration Per Period
---------------------------------          ---------------------------------------------------------
     <S>                           <C>        <C>            <C>           <C>           <C>
                                   Total      Less than                                    Over
     (Amounts in thousands)                     1 Year       1-3 Years     4-5 Years     5 Years
                                           ---------------------------------------------------------

Standby Letters of Credit.......   $327         $  -           $327         $  -          $  -
</TABLE>


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

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 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.

         Brian Hibbs,  d/b/a Comix Experience v. Marvel.  On May 6, 2002, in New
York State Supreme  Court,  County of New York,  Mr. Hibbs  commenced a putative
class action alleging that the Company  breached its own Terms of Sale Agreement
to comic book retailers and resellers, breached its obligation of good faith and
fair dealing,  fraudulently induced plaintiff and other members of the purported
class to buy comics and unjustly enriched itself. Mr. Hibbs sought certification
of the putative class and his  designation as its  representative,  compensatory
damages of $8 million on each cause of action and punitive  damages in an amount
to be  determined  at trial.  The parties have reached a proposed  settlement in
which the retailers  and resellers  would receive a credit to their account with
the  Company's  exclusive  distributor,  depending  on their prior  purchases of
certain comic book issues. The parties tendered that settlement to the Court for
approval,  but it was rejected on technical  grounds.  The parties have appealed
the rejection of the  settlement.  It is not known when the  Appellate  Division
will act on this  matter  or how long it will  take for  final  approval  of the
settlement.  In the event the matter  does not settle,  the  Company  intends to
defend vigorously against the claims made in this action on their merits.

                                      F-26


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

13.  Commitments and Contingencies (continued)

         Stan Lee v. Marvel.  On November 12, 2002, Stan Lee commenced an action
in the United  States  District  Court for the  Southern  District  of New York,
alleging  claims  for  breach  of  his  November  1,  1998  lifetime  employment
agreement.  Mr. Lee claims the right to a 10% profit participation in connection
with all film and television productions that utilize Marvel characters.  Marvel
has answered the  complaint  and denied all of its material  allegations.  After
both Mr. Lee and Marvel made partial summary  judgment  motions,  the Court held
that  Mr.  Lee  is  entitled  to  a  10%  profit   participation  from  Marvel's
exploitation  of theatrical and television  productions,  as well as merchandise
that was both based on motion pictures containing Marvel characters and that was
manufactured  and sold  directly by Marvel.  The Court held that Mr. Lee was not
entitled  to  any  participation  in  merchandise  licensed  to  third  parties.
Discovery on the issues of what profit  Marvel made is  continuing.  Because the
Company has historically  received only a small portion of its revenues from the
exploitation of theatrical and television productions, as opposed to merchandise
licensing  (based on its characters as they appear in its  publications and more
recently in theatrical and television productions),  the Company does not expect
this  litigation to have a material  effect on its future  business or financial
condition. No trial date has been set.

         Tribune  Entertainment  Company v. Marvel Enterprises,  Inc. On October
30, 2003, Tribune  Entertainment  Company  ("Tribune") filed a complaint against
the Company in New York State  Supreme  Court,  New York County.  The  complaint
alleges three causes of action: fraud, negligent  misrepresentation,  and breach
of warranty,  all in  connection  with the license from the Company  under which
Tribune produced the Mutant X television series.  Prior to release of the Mutant
X television series in 2001, both the Company and Tribune were sued by Twentieth
Century Fox Film Corporation  ("Fox"),  the licensee of the X-Men properties for
motion pictures,  among other rights.  That suit was settled between the Company
and Fox in February 2003. According to Tribune's complaint, Tribune settled with
Fox on October 3, 2003.  On December  11,  2003,  the Company  filed its answer,
denying  all  material   allegations   of  Tribune's   complaint  and  asserting
counterclaims.  The action is in the discovery  phase and no trial date has been
set.

14.      Benefits Plans

         The  Company  has a  401(k)  Plan  covering  substantially  all  of its
employees.  In addition,  in connection  with the 1999 sale of the assets of its
Fleer and  Skybox  International  subsidiaries,  the  Company  retained  certain
liabilities  related  to a defined  benefit  pension  plan for  certain of those
subsidiaries'  employees.  In prior  years,  this plan was amended to freeze the
accumulation of benefits and to prohibit new  participants.  Assuming a discount
rate of 6.25% for the 2004  expense,  5.75% for the  obligation  and an expected
rate of return of 7.00%,  the  accumulated  benefit  obligation is $20.4 million
($19.4  million as of December 31, 2003) of which $6.2 million  ($4.9 million as
of December 31, 2003) is unfunded at December 31, 2004.  This amount is recorded
as a component of accumulated  other  comprehensive  loss and is being amortized
over the estimated  remaining lives of the  participants.  Plan expenses for the
years ended December 31, 2002, 2003 and 2004 were not significant.

                                      F-27


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

14.  Benefit Plans (continued)

         The following  tables show  disclosure  amounts for the 2004  financial
statements  as  required  under SFAS No. 87 as amended  by SFAS No.  132.  These
figures are based on the population data and actuarial assumptions as of January
1, 2003 and January 1, 2004 and on a September 30 measurement date.

<TABLE>
<CAPTION>

                                                                           2003               2004
                                                                      ---------------    ----------------

  <S>                                                                  <C>                 <C>
  Accumulated Benefit Obligation, End of Year.....................     $ 19,361,711        $ 20,353,200
                                                                      ===============    ================

  Change in Projected Benefit Obligation
  Projected Benefit Obligation, October 1.........................     $ 18,749,102        $ 19,361,711
  Service cost....................................................                -                   -
  Interest cost...................................................        1,199,488           1,172,399
  Plan amendments.................................................                -                   -
  Assumption changes..............................................        1,022,710           1,056,513
  Actuarial (gain)/loss...........................................         (352,691)             25,234
  Benefits paid...................................................       (1,256,898)         (1,262,657)
                                                                      ---------------    ----------------
  Projected benefit obligation, September 30......................     $ 19,361,711        $ 20,353,200
                                                                      ===============    ================

  Change in plan assets
  Plan assets at fair value, October 1............................     $ 14,198,302        $ 14,416,890
  Actual return on plan assets....................................        1,363,631             652,682
  Company contributions...........................................          111,855             317,116
  Benefits paid...................................................       (1,256,898)         (1,262,657)
                                                                      ---------------    ----------------
  Plan assets at fair value, September 30.........................     $ 14,416,890        $ 14,124,031
                                                                      ===============    ================

   Recognition of prepaid (accrued) and total amount recognized as
     of December 31
  Projected benefit obligation....................................     $(19,361,711)       $(20,353,200)
  Fair value of assets............................................       14,416,890          14,124,031
                                                                      ---------------    ----------------
  Funded status...................................................       (4,944,821)         (6,229,169)
  Unrecognized net transition (asset) obligation..................                -                   -
  Unrecognized prior service cost.................................         (593,529)           (539,837)
  Unrecognized net (gain) loss....................................        4,749,139           6,167,192
  Contribution adjustment.........................................           27,569              62,057
                                                                      ---------------    ----------------
  Prepaid (accrued) pension cost as of December 31 ...............     $   (761,642)       $   (539,757)
                                                                      ===============    ================

  Prepaid benefit cost............................................     $          -        $          -
  Accrued benefit liability.......................................       (4,917,252)         (6,167,112)
  Intangible asset................................................                -                   -
  Accumulated other comprehensive income..........................        4,155,610           5,627,355
                                                                      ---------------    ----------------
  Total recognized as of December 31..............................     $   (761,642)       $   (539,757)
                                                                      ===============    ================
</TABLE>

                                      F-28


<PAGE>


14.  Benefit Plans (continued)

<TABLE>
<CAPTION>

                                                                           2003               2004
  <S>                                                                   <C>                <C>
  Total cost for plan year
  Service cost....................................................      $         -        $         -
  Interest cost...................................................        1,199,488          1,172,399
  Expected return on plan assets..................................       (1,088,715)        (1,109,736)
  Amortization of:
     Unrecognized net (gain) loss.................................                -                  -
     Unrecognized prior service cost..............................          (53,692)           (53,692)
     Unrecognized net asset obligation............................           93,244            120,748
                                                                      --------------- -- ----------------
  Net periodic pension cost.......................................      $   150,325        $   129,719
                                                                      ===============    ================

  Other comprehensive income......................................      $   355,551        $ 1,471,745
                                                                      ===============    ================

  Measurement date................................................        9/30/2003          9/30/2004

  Assumptions used for annual expense
  Discount rate...................................................            6.75%              6.25%
  Expected return on plan assets..................................            8.00%              8.00%
  Rate of consumption increase....................................              N/A                N/A

  Assumptions used for Year-End Disclosure
  Discount rate...................................................            6.25%              5.75%
  Rate of consumption increase....................................              N/A                N/A

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

  Expected company contribution for 2005..........................                         $ 1,063,702

  Expected benefit payments:
     2005.........................................................                           1,246,000
     2006.........................................................                           1,224,000
     2007.........................................................                           1,232,000
     2008.........................................................                           1,250,000
     2009.........................................................                           1,280,000
     2010-2014....................................................                           7,209,000
</TABLE>

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

                                      F-29


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

15.      Segment Information

         The  Company   operates  its   businesses   in  three   segments:   Toy
Merchandising and Distribution, Publishing and Licensing Segments.

<TABLE>
<CAPTION>

                                               Toys      Publishing    Licensing   Corporate      Total
                                           ------------------------------------------------------------------
                                                                    (in thousands)
 <S>                                         <C>          <C>          <C>          <C>          <C>
 Year  ended December 31, 2002
 Net sales.................................  $176,791     $ 64,501     $  57,754    $      -     $299,046
 Gross profit..............................    70,596       33,060        53,287           -      156,943
 Operating income (loss)...................    30,665       19,587        47,575     (17,303)      80,524

 Total capital expenditures................     2,973           22            --           -        2,995

 Total identifiable assets.................    44,147       75,637       397,735           -      517,519

                                               Toys      Publishing    Licensing    Corporate      Total
                                           ------------------------------------------------------------------
                                                                    (in thousands)
 Year  ended December 31, 2003
 Net sales.................................  $149,922     $ 73,255     $ 124,449    $      -     $347,626
 Gross profit..............................   104,758       38,953       124,449           -      268,160
 Operating income (loss)...................    77,905       25,442        83,227     (19,352)     167,222

 Total capital expenditures................     3,542            -             -           -        3,542

 Total identifiable assets.................   300,135       69,910       371,812           -      741,857

                                               Toys      Publishing    Licensing    Corporate      Total
                                           ------------------------------------------------------------------
                                                                    (in thousands)
 Year  ended December 31, 2004
 Net sales.................................  $212,791     $ 85,943     $ 214,734    $      -     $513,468
 Gross profit..............................    90,186       48,959       214,734           -      353,879
 Operating income (loss)...................    58,144       37,272       152,726     (23,729)     224,413

 Total capital expenditures................     3,431            -           155           -        3,586

 Total identifiable assets.................   156,493       64,810       493,511           -      714,814
</TABLE>


         The Company has  reevaluated  and revised  certain  revenue and expense
classifications  within its internal reporting of segment performance,  the same
reporting that is used by executive  management to monitor and make decisions on
operating matters.  As a result,  during the fourth quarter of 2004, the Company
began classifying  revenue from its master toy licensee,  Toy Biz Worldwide Ltd.
("TBW"), and related expenses, within its Toy segment.  Previously, such revenue
and expenses were classified within the Company's  Licensing  segment.  Revenues
from TBW  reflect a broader  set of efforts on the part of the  Company  than do
revenues from the Company's other licensees. All TBW toys produced under license
from  the  Company  are  created,  designed,  marketed  and  sold for TBW by the
Company's Toy segment,  under an agency  agreement  between TBW and the Company.
This is unlike other license  arrangements where the Company performs no similar
design, marketing or sales services. Because the services provided to TBW by the
Company's Toy segment  involve efforts that are similar in nature to the efforts
associated  with the Company's own toys,  the Company  believes this change will
better  aggregate  the results  derived from  Marvel-branded  toys  developed by
Marvel and more clearly reflect  operating results used by management to measure
the  performance  of the Toy  operations.  The Company  also  believes  that the
classification  of earnings  from TBW will better  portray  trends in Marvel toy
brands  designed  and  marketed  by the  Company.  As a result  of this  change,
prior-period segment information has been reclassified as follows:

                                      F-30


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

15.  Segment Information (continued)

<TABLE>
<CAPTION>

                   Year ended December 31, 2002           Year ended December 31, 2003           Year ended December 31, 2004
                Previously    Reclass        As        Previously    Reclass        As        Previously   Reclass         As
                 Reported    Adjustment   Adjusted      Reported    Adjustment   Adjusted     Reported    Adjustment    Adjusted
                ----------- ------------- ----------   ----------- ------------- ----------   ----------- ------------- ----------
                                                                 (in thousands)
<S>              <C>           <C>        <C>             <C>         <C>         <C>         <C>           <C>          <C>
Net Sales
   Toys....      $154,983      $21,808    $176,791        $85,167     $64,755     $149,922    $ 197,604     $ 15,187     $212,791
   Licensing       79,562      (21,808)     57,754        189,204     (64,755)     124,449      229,921      (15,187)     214,734
Gross Profit
   Toys....        48,788       21,808      70,596         40,003      64,755      104,758       74,999       15,187       90,186
   Licensing       75,095      (21,808)     53,287        189,204     (64,755)     124,449      229,921      (15,187)     214,734
Operating
Income
   Toys....         8,857       21,808      30,665         21,723      56,182       77,905       45,655       12,489       58,144
   Licensing       69,383      (21,808)     47,575        139,409     (56,182)      83,227      165,215      (12,489)     152,726
</TABLE>


Toy Merchandising and Distribution Segment

         The Toy segment  designs,  develops,  markets and distributes a limited
line of toys to the worldwide marketplace.  The Company's toy products are based
upon movies and  television  shows  featuring  Spider-Man  and  produced by Sony
Pictures,  and upon the movie trilogy Lord of the Rings (New Line  Cinema).  The
Spectra  Star  division of the  Company  (which was closed  mid-2003)  designed,
produced and sold kites in both mass market  stores and  specialty  hobby shops.
Spectra  Star's  sales  amounted to $10.4  million and $1.3  million and for the
years  ended  December  31,  2003 and 2004,  respectively.  Its total  assets at
December 31, 2004 of $4.2 million consist principally of land and buildings.

Publishing Segment

         The  Publishing  segment  creates and  publishes  comic books and trade
paperbacks principally in North America.  Marvel has been publishing comic books
since 1939 and has developed a roster of more than 5,000 Marvel Characters.  The
Company's  titles feature classic Marvel Super Heroes,  Spider-Man,  X-Men,  the
Incredible Hulk,  Daredevil,  newly developed  Marvel  Characters and characters
created by other entities and licensed to the Company.

Licensing Segment

         The Licensing  segment  relates to the licensing of, or joint  venture,
involving the Marvel Characters for use in a wide variety of products, including
toys,  electronic  games,  apparel,  accessories,   footwear,  collectibles  and
novelties;  in a variety of media, including feature films, television programs,
and  destination-based  entertainment  (e.g.,  theme parks); and for promotional
use.

                                      F-31


<PAGE>


                            MARVEL ENTERPRISES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                December 31, 2004

15.  Segment Information (continued)

<TABLE>
<CAPTION>

                                     Revenue by Geographic Area*
----------------------------------------------------------------------------------------------------
                                           (in thousands)
                             2002                        2003                       2004
                 ---------------------------  -------------------------- ---------------------------

                      U.S.        Foreign         U.S.        Foreign         U.S.        Foreign
                 -----------------------------------------------------------------------------------
<S>                <C>           <C>           <C>           <C>           <C>           <C>
Licensing.....     $  47,565     $  10,189     $ 106,264     $  18,185     $ 173,806     $  40,928
Publishing....        53,678        10,823        61,363        11,892        72,779        13,164
Toys..........       132,434        44,357       118,687        31,235       140,092        72,699
                 ------------- ------------- ------------- ------------- ------------- -------------
Total.........     $ 233,677     $  65,369     $ 286,314     $  61,312     $ 386,677     $ 126,791
                 ============= ============= ============= ============= ============= =============
</TABLE>

*   $13,560,  $54,080,  and  $11,446 of the  domestic  toy  revenue  and $8,248,
$10,675  and  $3,741  of the  foreign  toy  revenues  for  2002,  2003 and 2004,
respectively,  are  attributable  to  royalties  and service fees from toy sales
generated by TBW, which is based in Hong Kong.

                                      F-32


<PAGE>


                            MARVEL ENTERPRISES, INC.



                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>


                                            Balance          Charged to Sales       Charged to                        Balance
                                          At Beginning         or Costs and           Other         Deductions         at End
              Description                  of Period             Expenses            Accounts           (3)          of Period
 --------------------------------------------------------------------------------------------------------------------------
                                                                (in thousands)
 Year Ended December 31, 2002
 Allowances included in Accounts
    Receivable, Net:

<S>                                       <C>               <C>      <C>             <C>             <C>              <C>
 Doubtful accounts--current............   $   5,275         $  3,335 (2)             $    -          $   1,151        $   7,459
 Doubtful accounts--non-current........           -                -                      -                  -                -
 Advertising, markdowns, volume
    discounts and other................      11,838           15,718 (1)                  -             15,600           11,956

 Year Ended December 31, 2003
 Allowances included in Accounts
    Receivable, Net:

 Doubtful accounts--current............       7,459            1,124 (2)                  -              3,510            5,073
 Doubtful accounts--non-current........         -                -                        -                  -                -
 Advertising, markdowns, volume
    discounts and other................      11,956           12,859 (1)                138             13,108           11,845

 Year Ended December 31, 2004
 Allowances included in Accounts
    Receivable, Net:

 Doubtful accounts--current............       5,073              499 (2)               (323)               398            4,851
 Doubtful accounts--non-current........         -
 Advertising, markdowns, volume
    discounts and other................      11,845           13,355 (1)                  -             14,033           11,167
</TABLE>


(1) Charged to sales.
(2) Charged to costs and expenses.
(3) Allowances utilized and/or paid.

                                      F-33