Marvel Entertainment 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2009

or

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

For the transition period from ___________________ to ___________________

Commission file number 1-13638

MARVEL ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

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

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

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

(Former name, former address and former fiscal year, if changed since last report)

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 þ    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨    No ¨  [This requirement is not yet applicable to the registrant.]

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

Large accelerated filer  þ Accelerated filer  ¨ Non-Accelerated filer  ¨ (Do not check if a smaller reporting company) Smaller reporting company  ¨

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

Yes ¨    No þ

At October 30, 2009, the number of outstanding shares of the registrant's common stock, par value $.01 per share, was 78,500,680, including 474,312 shares of restricted stock.

TABLE OF CONTENTS

			Page
PART I.  FINANCIAL INFORMATION
	Item 1	Condensed Consolidated Financial Statements (unaudited)	1
		Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	2
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008	3
		Condensed Consolidated Statements of Equity and Comprehensive Income for the Nine Months Ended September 30, 2009 and 2008	4
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
		Results of Operations	27
		Liquidity and Capital Resources	36
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	39
	Item 4	Controls and Procedures	40
PART II.  OTHER INFORMATION
	Item 1	Legal Proceedings	42
	Item 1A	Risk Factors	42
	Item 6	Exhibits	42
SIGNATURES			43
EXHIBIT INDEX			43

(i)

Introductory Note

On August 31, 2009, Marvel Entertainment, Inc. announced that it had entered into a merger agreement with The Walt Disney Company (“Disney”).  Unless otherwise stated, the forward-looking information contained in this report does not take into account or give effect to the impact of our proposed merger with Disney.  For additional information regarding the proposed merger, please see the discussion under the heading “Description of Business and Principles of Consolidation—Recent Developments—Proposed Merger with The Walt Disney Company” in Note 2 to our condensed consolidated financial statements.

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

(Unaudited)

1

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,			December 31,
	2009			2008
	(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	109,604		$	105,335
Restricted cash		37,266			12,272
Short-term investments		–			32,975
Accounts receivable, net		28,853			144,487
Inventories, net		12,356			11,362
Income tax receivable		–			2,029
Deferred income taxes, net		27,959			34,072
Prepaid expenses and other current assets		8,442			5,135
Total current assets		224,480			347,667
Fixed assets, net		4,523			3,432
Film inventory, net		217,416			181,564
Goodwill		346,152			346,152
Accounts receivable, non–current portion		5,157			1,321
Income tax receivable, non–current portion		6,264			5,906
Deferred income taxes, net – non–current portion		22,458			13,032
Deferred financing costs, net		2,075			5,810
Restricted cash, non–current portion		41,742			31,375
Other assets		5,801			455
Total assets	$	876,068		$	936,714
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	1,609		$	2,025
Accrued royalties		84,355			76,580
Accrued expenses and other current liabilities		40,183			40,635
Income tax payable		4,926			–
Deferred revenue		73,159			81,335
Film facility		–			204,800
Total current liabilities		204,232			405,375
Accrued royalties, non-current portion		556			10,499
Deferred revenue, non-current portion		87,438			48,939
Film facility, non-current portion		21,537			8,201
Income tax payable, non-current portion		71,597			59,267
Other liabilities		13,811			8,612
Total liabilities		399,171			540,893
Commitments and contingencies
Marvel Entertainment, Inc. stockholders’ equity:
Preferred stock, $.01 par value, 100,000,000 shares authorized, none issued					–
Common stock, $.01 par value, 250,000,000 shares authorized, 134,704,780 issued and 78,021,369 outstanding in 2009 and 134,397,258 issued and 78,408,082 outstanding in 2008		1,347			1,344
Additional paid-in capital		754,621			750,132
Retained earnings		649,044			555,125
Accumulated other comprehensive loss		(4,457	)		(4,617	)
Total Marvel Entertainment, Inc. stockholders’ equity before treasury stock		1,400,555			1,301,984
Treasury stock, at cost, 56,683,411 shares in 2009 and 55,989,176 shares in 2008		(921,700	)		(905,293	)
Total Marvel Entertainment, Inc. stockholders’ equity		478,855			396,691
Noncontrolling interest in consolidated Joint Venture		(1,958	)		(870	)
Total equity		476,897			395,821
Total liabilities and equity	$	876,068		$	936,714

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

2

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
	(in thousands, except per share amounts)
Net sales	$	105,663	$	182,499		$	418,893	$	451,925
Costs and expenses:
Cost of revenues (excluding depreciation expense)		35,844		60,351			153,454		108,175
Selling, general and administrative		33,633		35,596			105,777		104,175
Depreciation and amortization		401		401			1,057		1,164
Total costs and expenses		69,878		96,348			260,288		213,514
Other income		855		2,051			4,179		22,481
Operating income		36,640		88,202			162,784		260,892
Interest expense		2,736		5,656			9,103		14,228
Interest income		155		870			481		2,812
(Loss) gain on repurchase of debt		–		(417	)		–		1,916
Income before income tax expense		34,059		82,999			154,162		251,392
Income tax expense		13,139		30,239			57,978		94,423
Net income		20,920		52,760			96,184		156,969
Noncontrolling interest in consolidated Joint Venture		504		2,134			2,265		14,441
Net income attributable to Marvel Entertainment, Inc.	$	20,416	$	50,626		$	93,919	$	142,528
Basic and diluted earnings per share:
Net income attributable to Marvel Entertainment, Inc.	$	20,416	$	50,626		$	93,919	$	142,528
Weighted average shares outstanding:
Weighted average shares for basic earnings per share		78,018		78,403			78,090		77,946
Effect of dilutive stock options and restricted stock		619		514			446		652
Weighted average shares for diluted earnings per share		78,637		78,917			78,536		78,598
Earnings per share, attributable to Marvel Entertainment, Inc.:
Basic	$	0.26	$	0.65		$	1.20	$	1.83
Diluted	$	0.26	$	0.64		$	1.20	$	1.81

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

3

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

AND COMPREHENSIVE INCOME

(unaudited)

											Accumulated Other Comprehensive Loss
	Common Stock Shares			Common Stock Amount		Additional Paid-In Capital			Retained Earnings		Foreign Currency			Pension Liability			Treasury Stock			Noncontrolling Interests in Consolidated Joint Venture			Total Equity
	(in thousands)
Balance at December 31, 2008		78,408		$	1,344	$	750,132		$	555,125	$	(812	)	$	(3,805	)	$	(905,293	)	$	(870	)	$	395,821
Net settlement of employee stock options exercised		80			1		(38	)		–		–			–			–			–			(37	)
Tax benefit of stock options exercised, net		–			–		551			–		–			–			–			–			551
Restricted stock vesting		298			2		(2	)		–		–			–			–			–			–
Common stock retired		(71	)		–		(2,073	)		–		–			–			–			–			(2,073	)
Treasury stock, at cost		(694	)		–		–			–		–			–			(16,407	)		–			(16,407	)
Compensatory stock expense		–			–		6,051			–		–			–			–			–			6,051
Distributions to the noncontrolling interest in consolidated Joint Venture (including non-cash distributions of $44 related to foreign tax credits)		–			–		–			–		–			–			–			(3,353	)		(3,353	)
Net income		–			–		–			93,919		–			–			–			2,265			96,184
Other comprehensive (loss) income		–			–		–			–		(74	)		234			–			–			160
Comprehensive income*		–			–		–			–		–			–			–			–			96,344
Balance at September 30, 2009		78,021		$	1,347	$	754,621		$	649,044	$	(886	)		(3,571	)	$	(921,700	)	$	(1,958	)	$	476,897

*Comprehensive income attributable to Marvel Entertainment, Inc. stockholders was $94,079.

											Accumulated Other Comprehensive Loss
	Common Stock Shares			Common Stock Amount		Additional Paid-In Capital			Retained Earnings		Foreign Currency			Pension Liability			Treasury Stock			Noncontrolling Interests in Consolidated Joint Venture			Total Equity
	(in thousands)
Balance at December 31, 2007		77,625		$	1,333	$	728,815		$	349,590	$	342		$	(3,737	)	$	(894,840	)	$	556		$	182,059
Employee stock options exercised		968			8		8,277			–		–			–			–			–			8,285
Tax benefit of stock options exercised, net		–			–		9,013			–		–			–			–			–			9,013
Restricted stock vesting		311			3		(3	)		–		–			–			–			–			–
Common stock retired		(82	)		–		(2,081	)		–		–			–			–			–			(2,081	)
Treasury stock, at cost		(414	)		–		–			–		–			–			(9,945	)		–			(9,945	)
Compensatory stock expense		–			–		4,743			–		–			–			–			–			4,743
Distributions to the noncontrolling interest in consolidated Joint Venture (including non-cash distributions of $404 related to foreign tax credits)		–			–		–			–		–			–			–			(15,539	)		(15,539	)
Net income		–			–		–			142,528		–		��	–			–			14,441			156,969
Other comprehensive income		–			–		–			–		(1,249	)		129			–			–			(1,120	)
Comprehensive income**		–			–		–			–		–			–			–			–			155,849
Balance at September 30, 2008		78,408		$	1,344	$	748,764		$	492,118	$	(907	)	$	(3,608	)	$	(904,785	)	$	(542	)	$	332,384

**Comprehensive income attributable to Marvel Entertainment, Inc. stockholders was $141,408.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

4

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended
	September 30,
	2009			2008
	(in thousands)
Cash flows from operating activities:
Net income	$	96,184		$	156,969
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,057			1,164
Amortization of film inventory		110,422			65,599
Provision for doubtful accounts		218			–
Gain on repurchase of debt		–			(1,916	)
Amortization of deferred financing costs		3,735			3,736
Unrealized gain on interest rate cap and foreign currency forward contracts		(635	)		(253	)
Non-cash charge for stock-based compensation		6,051			4,743
Excess tax benefit from stock-based compensation		(551	)		(9,013	)
Impairment of long-term assets		3,906			1,663
Deferred income taxes		(3,325	)		(16,592	)
Changes in operating assets and liabilities:
Accounts receivable		111,580			(4,915	)
Inventories		(994	)		(852	)
Prepaid expenses and other current assets		(3,307	)		(802	)
Film inventory		(150,081	)		(48,220	)
Other assets		(3,111	)		(3,346	)
Deferred revenue		30,323			(5,085	)
Income taxes payable		19,303			58,847
Accounts payable, accrued expenses and other current liabilities		(154	)		(14,954	)
Net cash provided by operating activities		220,621			186,773
Cash flows from investing activities:
Purchases of fixed assets		(2,247	)		(441	)
Sales of short-term investments		32,983			66,055
Purchases of short-term investments		(8	)		(45,039	)
Acquisition of other intangibles		(1,600	)		–
Change in restricted cash		(35,361	)		1,270
Net cash (used in) provided by investing activities		(6,233	)		21,845
Cash flows from financing activities:
Borrowings from film facilities		33,037			75,600
Repayments of film facilities		(224,501	)		(180,509	)
Distributions to the noncontrolling interest in consolidated Joint Venture		(3,309	)		(15,135	)
Purchases of treasury stock		(16,407	)		(9,945	)
Exercise of stock options		483			8,285
Excess tax benefit from stock-based compensation		551			9,013
Net cash used in financing activities		(210,146	)		(112,691	)
Effect of exchange rates on cash		27			(275	)
Net increase in cash and cash equivalents		4,269			95,652
Cash and cash equivalents, at beginning of period		105,335			30,153
Cash and cash equivalents, at end of period	$	109,604		$	125,805

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(unaudited)

1. BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Marvel Entertainment, Inc. and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operations and cash flows for the periods presented have been included.  The unaudited Condensed Consolidated Statements of Income for the three and nine-month periods ended September 30, 2009 and the unaudited Condensed Consolidated Statements of Equity and Comprehensive Income and Cash Flows for the nine-month period ended September 30, 2009 are not necessarily indicative of those for the full year ending December 31, 2009.  The year-end 2008 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  For further information on our historical financial results, refer to the Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Certain reclassifications have been made to prior periods to conform to the current period presentation.  Specifically, we have made adjustments as a result of the adoption of authoritative guidance on noncontrolling interests (see Note 2).

2. SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Principles of Consolidation

Recent Developments

Proposed Merger with The Walt Disney Company.  On August 31, 2009, Marvel Entertainment, Inc. (“Marvel”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Walt Disney Company (“Disney”) pursuant to which Disney has agreed to acquire Marvel (the “Merger”).  The Merger Agreement has been approved by the Boards of Directors of both Marvel and Disney.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”) each share of Marvel common stock issued and outstanding immediately prior to the Effective Time (other than any dissenting shares and treasury shares and subject to adjustment for certain changes in Disney common stock or Marvel common stock such as reclassifications or stock splits) will be converted into the right to receive (i) $30 in cash (the “Cash Consideration”) and (ii) 0.7452 shares of Disney common stock (the “Exchange Ratio”, and together with the Cash Consideration, the “Merger Consideration”).  However, if the aggregate value of all shares of Disney common stock that would be issued pursuant to the Merger (other than shares issued to a subsidiary of Marvel or a subsidiary of Disney) (the “Total Stock Consideration”), valued at the Closing Date Price (as defined below), is less than 40% of the sum of the Total Stock Consideration plus the total amount of cash paid to Marvel stockholders (including cash paid in lieu of fractional shares and deemed paid in respect of dissenting shares) (the “Total Merger Consideration”), then the Exchange Ratio will be increased, and the amount of cash paid per share of Marvel common stock will be correspondingly decreased, until the total stock consideration equals 40% of the Total Merger Consideration.  The Closing Date Price is the lesser of (a) the closing price, (b) the average of the high and low sales prices and (c) the weighted average trading price, in each case, for one share of Disney common stock on the closing date of the merger as reported on the NYSE.  For every 0.0001 increase to the Exchange Ratio that is made, the amount of cash paid per share of Marvel common stock will be reduced by the product of 0.0001 multiplied by the average of $26.84 and the Closing Date Price.

6

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

The completion of the Merger is subject to customary closing conditions, including, among other things, the approval of the Merger by the stockholders of Marvel, the receipt of antitrust approvals, compliance by Disney and Marvel with their respective obligations under the Merger Agreement, and the effectiveness of a Form S-4 registration statement filed by Disney.

The Merger Agreement contains certain termination rights for each of Disney and Marvel.  If the merger agreement is terminated under specified circumstances (including a termination by Marvel in response to a superior proposal to Disney’s merger proposal), Marvel may be required to pay Disney a termination fee of $140 million.

Concurrently with the execution of the Merger Agreement, Disney entered into a voting agreement (the “Voting Agreement”) with Isaac Perlmutter, our Chief Executive Officer, several of his affiliates and Marvel.  Pursuant to the terms of the Voting Agreement, Mr. Perlmutter and those affiliates agreed, among other things, to vote their respective shares of Marvel common stock (representing approximately 37% of the outstanding shares of Marvel common stock) in favor of the adoption of the Merger Agreement and approval of the Merger and against the approval of any alternative transaction.  Additionally, pursuant to the terms of the Voting Agreement, Mr. Perlmutter and those affiliates have agreed not to sell or transfer their respective shares of Marvel common stock, subject to certain exceptions, or to solicit any alternative transaction.  The Voting Agreement will terminate upon the earliest to occur of the Effective Time of the Merger and the termination of the Merger Agreement in accordance with its terms.

The Merger Agreement, the Merger and the Voting Agreement are described in greater detail in Amendment No. 1 to the Registration Statement on Form S-4 filed by Disney with the Securities and Exchange Commission on October 27, 2009.

General

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

We operate in three integrated and complementary operating segments: Licensing, Publishing and Film Production.

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

The accompanying condensed consolidated financial statements include our accounts and those of our subsidiaries, including the Film Slate Subsidiaries (as defined in our Form 10-K) and, the Joint Venture.  Upon consolidation, all inter-company accounts and transactions are eliminated.

Supplemental Disclosure of Cash Flow Information

	Nine Months Ended
	September 30,
	2009		2008
	(in thousands)
Interest paid during the period	$	7,964	$	17,207
Income taxes paid during the period		41,826		52,186
Income tax refund		45		–

7

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

Our film-production expenditures, including expenditures funded by draw-downs from our film facility, appear on our condensed consolidated statements of cash flows as cash used in operating activities.  Those draw-downs appear on our condensed consolidated statements of cash flows as cash provided by financing activities.  Likewise, cash collections from our film productions are reflected in cash provided by operating activities; however, the related increase in restricted cash funded by these collections is reflected as cash used in our investing activities.

For the nine-month period ended September 30, 2009, the impairment of long-term assets principally includes a $1.8 million charge to write-off certain animation production costs in the Licensing segment and a $1.7 million write-off of abandoned script costs and associated pre-production costs in the Film Production segment.

For the nine-month period ended September 30, 2008, the impairment of long-term assets represented a $1.7 million write-off of costs associated with an abandoned script in the Film Production segment.

Recent Accounting Standards Adopted in 2009

In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance (the “Codification”), which was launched on July 1, 2009 and became the single source of authoritative nongovernmental GAAP, superseding existing FASB, AICPA, Emerging Issues Task Force (EITF) and related literature.  The Codification eliminates the GAAP hierarchy and establishes one level of authoritative GAAP.  All other literature is considered non-authoritative.  This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The implementation of this guidance changed how we disclose authoritative accounting pronouncements in the notes to our consolidated financial statements.

In December 2007, the FASB issued authoritative guidance on noncontrolling interests.  The guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements and requires disclosure, on the face of the consolidated statements of income, of the amounts of consolidated net income attributable to the company and to the noncontrolling interests.  This guidance is effective for fiscal years beginning on or after December 15, 2008.  On January 1, 2009, we adopted the provisions of this guidance.  The implementation of this guidance did not have a material impact on our consolidated financial statements or results of operations.  The 2008 financial information has been revised so that the basis of presentation is consistent with the 2009 financial information.

In February 2008, the FASB issued amendments to authoritative guidance on fair value measurements, which deferred the effective date of authoritative guidance on fair value measurements for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.  On January 1, 2009, we adopted these amendments to this authoritative guidance.  On January 1, 2008, we adopted the provisions of this authoritative guidance on fair value measurements related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis.  The implementation of this authoritative guidance and its amendments did not have a material impact on our consolidated financial statements or results of operations.

In December 2007, the FASB issued authoritative guidance on business combinations.  The guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired and any noncontrolling interest in the acquiree.  This guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination.  This guidance is effective for fiscal years beginning after December 15, 2008.  On January 1, 2009, we adopted the provisions of this guidance.  The implementation of this guidance did not have any impact on our consolidated financial statements or results of operations.

8

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

The FASB issued additional authoritative guidance on business combinations in March 2009, specifically, for the initial recognition and measurement, subsequent measurement, and disclosures of assets and liabilities arising from contingencies in a business combination as well as for pre-existing contingent consideration assumed as part of the business combination.  This guidance was effective as of January 1, 2009.  The implementation of this authoritative guidance did not have any impact on our consolidated financial statements or results of operations.  However, any business combinations entered into in the future may impact our consolidated financial statements as a result of the potential earnings volatility due to the changes described above.

In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes the accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued.  This guidance was effective beginning with our second quarter financial reporting and did not have a material impact on our consolidated financial statements or results of operations (see Note 13).

In April 2009, the FASB amended authoritative guidance on disclosures about the fair value of financial instruments, which was effective for the Company on June 30, 2009.  The amended guidance requires a publicly traded company to include disclosures about fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods.  In addition, the guidance requires an entity to disclose either in the body or in the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position.  The adoption of this amended guidance did not have any impact on our consolidated financial statements or results of operations.

Recent Accounting Standards Not Yet Adopted

In December 2008, the FASB amended authoritative guidance on retirement benefits and provided guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan.  The amended guidance is effective for fiscal years ending after December 15, 2009.  We are currently evaluating the potential impact of this amended guidance on our consolidated financial statements.

In September 2009, the EITF reached a consensus related to revenue arrangements with multiple deliverables.  The consensus will be issued by the FASB as an update to authoritative guidance for revenue recognition and will be effective for the Company on January 1, 2011. The updated guidance will revise how the estimated selling price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-alone value.  In addition, the revised guidance will require additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements.  We are currently evaluating the potential impact of the amended guidance on our consolidated financial statements or results of operations.

9

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

	September 30,			December 31,
	2009			2008
	(in thousands)
Accounts receivable, net, consists of the following:
Licensing:
Accounts receivable	$	9,051		$	9,434
Less allowances for doubtful accounts		(261	)		(278	)
Total licensing		8,790			9,156
Publishing:
Accounts receivable		27,540			30,474
Less allowance for:
Doubtful accounts		(334	)		(266	)
Allowance for returns		(12,096	)		(14,460	)
Total publishing		15,110			15,748
Film Production
Accounts receivable		4,917			119,459
All Other:
Accounts receivable		36			124
Total	$	28,853		$	144,487
Inventories, net, consists of the following:
Finished goods	$	5,686		$	5,734
Editorial and raw materials		6,670			5,628
Total	$	12,356		$	11,362
Accounts receivable , non-current portion, are due as follows:
2011	$	5,241		$	1,381
Present value discount		(84	)		(60	)
Total	$	5,157		$	1,321
Film inventory, net, consists of the following:
Theatrical Films:
Released, net of amortization	$	60,541		$	172,224
In production		133,056			4,752
In development or pre-production		12,774			2,505
Total theatrical films		206,371			179,481
Animatedtelevision productions:
Released, net of amortization		465			–
Completed and not released		929			–
In production		8,255			–
In development or pre-production		1,396			2,083
Total animatedtelevision productions		11,045			2,083
Total	$	217,416		$	181,564
Accrued royalties consists of the following:
Merchandise royalty obligations	$	1,545		$	1,556
Freelance talent		3,618			4,005
Studio and talent share of royalties		79,192			71,019
Total	$	84,355		$	76,580

10

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

	September 30,		December 31,
	2009		2008
	(in thousands)
Accrued expenses and other current liabilities consists of the following:
Inventory purchases	$	1,907	$	2,030
Bonuses		10,607		12,860
Legal fees and litigation accruals		4,312		2,111
Licensing common marketing funds		12,624		9,441
Interest		2,137		3,675
Other accrued expenses		8,596		10,518
Total	$	40,183	$	40,635

4. EARNINGS PER SHARE

Basic earnings per share attributable to Marvel Entertainment, Inc. is computed by dividing the net income attributable to Marvel Entertainment, Inc. for the period, attributable to common stock, by the weighted average number of common shares outstanding during the period.  Diluted net earnings per share attributable to Marvel Entertainment, Inc. is computed by dividing the net income attributable to Marvel Entertainment, Inc. for the period by the weighted-average number of common and potential common shares, if dilutive, outstanding during the period.  The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share attributable to Marvel Entertainment, Inc. by application of the treasury stock method, which includes consideration of stock-based compensation.

The total number of shares of our common stock outstanding as of September 30, 2009 was 78,021,369, net of treasury shares and restricted stock; assuming the exercise of all outstanding stock options (1,839,869) and the vesting of all outstanding restricted shares (474,312), the total number outstanding would be 80,335,550.  During the three and nine-month periods ended September 30, 2009, 2,750 and 391,831 shares of common stock, respectively, were issued through stock option exercises.

Options to purchase 0.1 million shares of common stock were not included in the calculation of diluted net earnings per share attributable to Marvel Entertainment, Inc. for the nine-month period ended September 30, 2009, respectively, and 0.2 million  and 0.7 million shares of common stock were not included in the calculation of diluted net earnings per share attributable to Marvel Entertainment, Inc. for the three and nine-month periods ended September 30, 2008, because they were antidilutive.

5. COMPREHENSIVE INCOME

Comprehensive income includes all changes in equity during a period except those resulting from the investments by, and distributions to, stockholders.

	For the three months ended
	September 30,
	2009			2008
	(in thousands)
Net income	$	20,920		$	52,760
Other comprehensive (loss) income:
Foreign currency		39			(1,371	)
Pension liability		78			42
Total other comprehensive income (loss)		117			(1,329	)
Comprehensive income		21,037			51,431
Comprehensive income attributable to noncontrolling interest		(504	)		(2,134	)
Comprehensive income attributable to Marvel Entertainment, Inc.	$	20,533		$	49,297

11

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

6. DEBT FINANCING

Film Facility

MVL Film Finance LLC, a wholly owned bankruptcy-remote subsidiary of ours, maintains a $525 million credit facility for producing theatrical motion pictures based on certain of our characters.  Our ability to borrow under the film facility expires on September 1, 2012.  We are required to repay all borrowings under the film facility by September 1, 2014, subject to extension by up to ten months under certain circumstances.  The film facility’s final expiration date is September 1, 2016, subject to extension by up to ten months under certain circumstances.  The expiration date and final date for borrowings under the film facility occur sooner if the films produced under the facility fail to meet certain defined performance measures.  The film facility consists of $465 million in revolving senior bank debt and $60 million in mezzanine debt, which is subordinated to the senior bank debt.  During 2008, we repurchased, and are now holding, all of the mezzanine debt related to the film facility.

Ambac Assurance Corporation has insured repayment of the senior bank debt.  In exchange for the repayment insurance, we pay Ambac a fee calculated as a percentage of used and unused senior bank debt, but in no event less than $3.4 million per year.  The weighted average interest rate of our senior bank debt was 3.28% at September 30, 2009, inclusive of the percentage fee owed to Ambac (without consideration of that fee’s minimum).  In addition, commitment fees on unused senior bank debt are charged at the rate of 0.90% per annum, inclusive of the percentage fee owed to Ambac (without consideration of that fee’s minimum).

Debt service under the film facility must be paid from the films’ net collections, rather than from any of our other sources of cash.  The film facility requires us to maintain certain interest and liquidity reserves to cover future debt service payments in the event that the films’ net collections are not sufficient to make such payments.  As of September 30, 2009, total reserves were $27.9 million, and are included in non-current restricted cash.

The film facility also requires us to fund a minimum of 33% of the budget of each film distributed under our 2008 distribution agreement with Paramount.  The film facility will provide a maximum of 67% of the budget (reduced by the proceeds of any third-party co-financing).  During the first quarter of 2009, we funded 33% of the Iron Man 2 budget, all of which was spent, as of September 30, 2009 to fund production costs.

In the first quarter of 2009, we amended the film facility to allow us, at our option, to utilize a lower cost completion bond structure.  In order to take advantage of this structure, we funded into escrow approximately $31.5 million for Iron Man 2 for the duration of production.  This amount (plus interest accrued) is included in current restricted cash as of September 30, 2009.

Our films’ net collections may only be used to service debt under the film facility, fund production costs of other films produced under the film facility or pay certain administrative costs of the film facility, and are therefore included in restricted cash (see Note 7).

As of September 30, 2009, we had $21.5 million of outstanding borrowings under the film facility.

12

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

Corporate Line of Credit

We maintain a $100 million revolving line of credit with HSBC Bank USA, National Association (the “HSBC Line of Credit”) with a sub-limit for the issuance of letters of credit.  The HSBC Line of Credit, as amended, expires on March 31, 2011.  Borrowings under the HSBC Line of Credit may be used for working capital and other general corporate purposes and for repurchases of our common stock.  In March 2009, the HSBC Line of Credit was amended and now provides for an unused commitment fee of 0.45% commencing April 1, 2009.  The HSBC Line of Credit contains customary event-of-default provisions and a default provision based on our market capitalization.  We continue to be in compliance with the covenants of the facility, which include covenants related to net income, leverage and free cash flow.  The HSBC Line of Credit is secured by a lien on (a) our accounts receivable, (b) our rights under our toy license with Hasbro and (c) all of our treasury stock repurchased by us after November 9, 2005.  Borrowings under the HSBC Line of Credit bear interest at HSBC’s prime rate or, at our option, at LIBOR plus 1.25% per annum.  As of September 30, 2009, 32.1 million of our shares held in treasury are pledged as collateral under the HSBC Line of Credit.  As of September 30, 2009, we had $1.1 million (related to a letter of credit) outstanding under the HSBC Line of Credit.

7. RESTRICTED CASH

Cash that has been contractually restricted as to usage or withdrawal is included in the caption “Restricted cash”.  Restricted cash attributable to our Film Production segment includes our net film collections, borrowings under the film facility and any other funds designated to be used for film inventory costs, for debt service, for various reserves required under the film facility and for certain amounts required under our completion bond arrangements.  Restricted cash in the Film Production segment was $73.3 million as of September 30, 2009 and $39.6 million as of December 31, 2008.  Restricted cash not expected to be released within one year of the balance sheet date and restricted cash designated to be used for film inventory costs is classified as a non-current asset in the accompanying condensed consolidated balance sheets.

Restricted cash in the Licensing segment includes cash balances of the Joint Venture that are not freely available to either Sony Pictures or to us until distributed.  Distributions are made no less frequently than quarterly.

8. FAIR VALUE MEASUREMENTS

Authoritative guidance on fair value measurements and disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The guidance classifies the inputs used to measure fair value into the following hierarchy:

Level 1:  Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2:  Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability

Level 3: Unobservable inputs for the asset or liability

We endeavor to utilize the best available information in measuring fair value.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The following table sets forth our assets measured at fair value on a recurring basis as of September 30, 2009:

13

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

	Recurring Fair Value Measurements Using
	Total Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial Assets:
Interest rate cap	$	735		–	$	735		–

We are exposed to market risks from changes in interest rates, which may adversely affect our operating results and financial position.  When deemed appropriate, we minimize our risks from interest rate fluctuations using derivative financial instruments.  We use derivative financial instruments to manage risk and not for trading or other speculative purposes.  We do not use leveraged derivative financial instruments.  The interest rate cap is valued using broker quotations, or market transactions either in the listed or over-the counter markets.  This derivative instrument is therefore classified within level 2.  Gains and losses from changes in the fair value of the interest rate cap are recorded within other income in the accompanying condensed consolidated statements of income.

The estimated fair value of certain of our financial instruments, including cash equivalents, 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 has been discounted to its net present value, which approximates fair value.  The carrying value of our film facility debt approximates its fair value because the interest rates applicable to that debt are based on floating rates identified by reference to market rates.

Non-Financial Instruments

The majority of our non-financial instruments, which include goodwill, inventories and fixed assets, are not required to be carried at fair value on a recurring basis.  However, our goodwill is required to be evaluated for impairment annually, and all of our non-financial instruments are required to be evaluated for impairment if certain triggering events occur.  An evaluation that results in asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.

We account for film production costs in accordance with the guidance on Entertainment-Films, which requires that upon the occurrence of an event or change in circumstance that may indicate that the fair value of a film is less than its unamortized costs, an entity should determine the fair value of the film and write off the amount by which the unamortized capitalized costs exceed the film’s fair value.  Some of these events or changes in circumstance include: (i) an adverse change in the expected performance of a film prior to its release, (ii) actual costs substantially in excess of budgeted costs, (iii) substantial delays in completion or release schedules, (iv) changes in release plans, (v) insufficient funding or resources to complete the film and to market it effectively and (vi) the failure of actual performance subsequent to release to meet that which had been expected prior to release.  When required to determine the fair value of our films, we estimate the timing of ultimate cash to be received and apply a discounted cash flow methodology.

9. SEGMENT INFORMATION

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

Licensing Segment

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

14

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

Consumer Products.  We license our characters for use in a wide variety of consumer products, including toys, apparel, interactive games, electronics, homewares, stationery, gifts and novelties, footwear, food and beverages and collectibles.

Studio Licensing: Feature Films.  We have licensed some of our characters to major motion picture studios for use in motion pictures. For example, we currently have a license with Sony to produce motion pictures featuring the Spider-Man family of characters.  We also have outstanding licenses with studios for a number of our other characters, including The Fantastic Four, X-Men (including Wolverine), Daredevil/Elektra and Ghost Rider.  Under these licenses, we retain control over merchandising rights and retain more than 50% of merchandising-based royalty revenue.  We intend to self-produce, rather than license, all future films based on our characters that have not been licensed to third parties.

Studio Licensing: Television Programs. We license our characters for use in television programs.  Several television shows based on our characters are in various stages of development including animated programming based on Iron Man, X-Men (including Wolverine), and Black Panther.  Since January 2009, the new animated series “Wolverine and the X-Men” has been airing on Nicktoons Network in the United States and on various other international channels in Canada, United Kingdom, Latin America, Europe, Australia, Asia Pacific, and the Middle East.  In addition, as part of our efforts to build demand for our licensed consumer products, the Licensing segment has begun to self-produce animated television programming featuring Marvel characters.  By controlling the content and distribution of self-produced animation, we hope to increase our consumer products licensing activities more than is possible through animation whose content and distribution is under the control of animation licensees.

Studio Licensing:Made-for-DVD Animated Feature Films.  We have licensed some of our characters to an entity controlled by Lions Gate Entertainment Corp. to produce up to eight feature-length animated films for distribution directly to the home video market.  To date, six of these titles have been distributed under this arrangement.

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

Promotions.  We license our characters for use in short-term promotions of other companies’ products and services.

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

Publishing Segment

The Publishing segment creates and publishes comic books and trade paperbacks principally in North America.  Marvel has been publishing comic books since 1939 and has developed a roster of more than 5,000 characters.  Our titles include Spider-Man, X-Men, Fantastic Four, Iron Man, the Incredible Hulk, Captain America, the Avengers, and Thor.  In addition to revenues from the sale of comic books and trade paperbacks, the Publishing segment generates revenues from sales of advertising and subscriptions and from other activities, such as custom comics and digital media.  Our digital media activities have had a small but growing impact on our Publishing segment revenues, mostly through online advertising and digital comic subscription sales.  We expect continued moderate growth and diversification in Marvel digital media revenues as we continue to increase our online presence.

15

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

Film Production Segment

Until we began producing our own films, our growth strategy was to increase exposure of our characters by licensing them to third parties for development as movies and television shows.  The increased exposure creates revenue opportunities for us through increased sales of toys and other licensed merchandise.  Our self-produced movies, the first two of which were released in 2008, represent an expansion of that strategy that also increases our level of control in developing and launching character brands.  Our self-produced movies also offer us an opportunity to participate in the films’ financial performance to a greater extent than we could as a licensor.

Our self-produced films are financed primarily with our $525 million film facility.  The first two films produced by the Film Production segment were Iron Man, which was released on May 2, 2008, and The Incredible Hulk, which was released on June 13, 2008.  We are currently in post production on one film, Iron Man 2, scheduled to be released May 7, 2010, and we are in pre-production on another film, Thor, scheduled to be released May 20, 2011.  In addition, we are developing two other films, The First Avenger: Captain America and The Avengers, scheduled to be released on July 22, 2011 and May 4, 2012, respectively.

Set forth below is certain operating information of our segments.

	Licensing (1)(2)(3)		Publishing		Film Production			All Other (4)(5)			Total
	(in thousands)
Three months ended September 30, 2009
Net sales	$	48,863	$	31,975	$	24,825		$	–		$	105,663
Operating income (loss)		37,531		10,240		(2,273	)		(8,858	)		36,640
Three months ended September 30, 2008
Net sales	$	58,071	$	34,064	$	90,180		$	184		$	182,499
Operating income (loss)		42,477		12,700		40,422			(7,397	)		88,202
Nine months ended September 30, 2009
Net sales	$	181,524	$	89,464	$	147,905		$	–		$	418,893
Operating income (loss)		130,494		28,153		25,001			(20,864	)		162,784
Nine months ended September 30, 2008
Net sales	$	237,479	$	92,322	$	119,105		$	3,019		$	451,925
Operating income (loss)		205,386		34,334		40,569			(19,397	)		260,892

(1) In the first quarter of 2008, operating income included $19.0 million classified as Other Income from settlement payments received in connection with the early termination of two interactive licensing agreements.

(2) During the second quarter of 2008, we recorded a non-recurring credit of $8.3 million in SG&A expense to reflect a reduction in our estimate of royalties payable to actors starring in the Spider-Man movies for the use of their likeness in licensed products.

(3) During the third quarter of 2009, we recorded the effects of a favorable settlement of a studio licensee audit, which resulted in a reduction of $7.6 million to SG&A expense for amounts previously accrued.

16

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

(4) Operating loss in “All Other” for the nine-month period ended September 30, 2009 is net of $3.1 million received from a litigation trust established in connection with our emergence from bankruptcy proceedings in 1998 and a settlement reached by this trust and other third parties.  The amounts for the three months ended September 30, 2008 include $0.2 million of direct toy sales and $0.3 million of related operating income associated with our toy manufacturing operations, which we exited in early 2008.  The amounts for the nine months ended September 30, 2008 include $3.0 million of direct toy sales and $2.2 million of related operating income associated with our toy manufacturing operations.  The balance of “All Other” operating loss in the three and nine-month periods is primarily unallocated corporate overhead.

(5) Operating loss in “All Other” for the three and nine-month periods ended September 30, 2009, includes $2.9 million of costs (principally legal fees) we incurred associated with the proposed merger with Disney (see Note 2).

10. BENEFIT PLAN

In connection with the 1999 sale of a subsidiary, we retained certain liabilities related to the Fleer/Skybox International Retirement Plan, a defined benefit pension plan for employees of that subsidiary (the “Fleer/Skybox Plan”).  This plan has been amended to freeze the accumulation of benefits and to prohibit new participants.

Assumptions used for the 2009 and 2008 expense include a discount rate of 5.62% and 5.88%, and an expected rate of return on plan assets of 4.82% and 5.25%, respectively.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(in thousands)
Total cost for plan period:
Service cost	$	–		$	–		$	–		$	–
Interest cost		283			291			849			872
Expected return on plan assets		(197	)		(257	)		(590	)		(770	)
Amortization of:
Unrecognized net loss		53			50			159			151
Unrecognized prior service credit		(13	)		(13	)		(40	)		(40	)
Unrecognized net asset obligation		–			–			–			–
Net periodic pension cost	$	126		$	71		$	378		$	213

11. INCOME TAXES

At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our ordinary quarterly earnings.  The tax expense or benefit related to each significant, unusual, or extraordinary item that will be separately reported, or reported net of its related tax effect, is recognized in the interim period in which it occurs.  In addition, the effect of changes in tax laws, rates or tax status is recognized in the interim period in which the change occurs.

Estimation of the annual effective tax rate at the end of each interim period requires estimates of, among other things, the amount of our pre-tax income for the year, what portion of our income will be earned and taxed in foreign jurisdictions, what permanent and temporary differences we will record, and which of the deferred tax assets generated in the current year we will recover.  Each of those estimates requires significant judgment.  These estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or as the tax environment changes.

17

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

Our effective tax rates for the three and nine-month periods ended September 30, 2009 (38.6% and 37.6%, respectively) and for the three and nine-month periods ended September 30, 2008 (36.4% and 37.6%, respectively) were higher than the federal statutory rate due primarily to state and local taxes partially offset by the benefit associated with the earnings of the Joint Venture, as further described below.  The three and nine-month periods ended September 30, 2009 also include a charge related to a change in the New York City tax law enacted in the third quarter of 2009 and interest relating to certain proposed IRS adjustments, as discussed below.

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

We retain various state and local net operating loss ("NOL") carryforwards of $307.0 million, which will expire in various jurisdictions in the years 2009 through 2026.  As of September 30, 2009, there is a valuation allowance of $0.6 million against state NOL and capital loss carryforwards, as we believe it is more likely than not that those assets will not be realized in the future.

Our 2003 through 2006 federal income tax returns are currently under examination by the Internal Revenue Service (“IRS”).  During the quarter ended June 30, 2009, the IRS proposed an adjustment to the amount of federal NOL carryforwards that we utilized in the years under examination.  We determined the amount of available NOL carryforwards upon our emergence from bankruptcy in 1998 using a methodology consistent with our interpretation of then-current federal tax law and IRS guidance available at the time.  In 2003, the IRS issued a regulation that prospectively required a different methodology.  The basis of the IRS position is that, in 1998, we should have used a methodology similar to the approach of the 2003 regulation.  If the IRS were to prevail in its position, federal NOL carryforwards used in the examination period would be disallowed and we would owe approximately $23 million in additional income tax and interest.  We firmly believe the methodology we employed to calculate available NOL carryforwards from 1998 was appropriate and plan to aggressively contest the proposed adjustment.

In addition, during the quarter ended September 30, 2009, the IRS proposed certain other adjustments, which are substantially timing in nature.  Tax expense for the nine months ended September 30, 2009 includes a charge for interest relating to the proposed adjustments.

Unrecognized tax benefits totaled $90.8 million and $57.0 million at September 30, 2009 and December 31, 2008, respectively.  The increase for the nine-months ended September 30, 2009 was the result of: (i) tax positions we claimed during that period in various jurisdictions in which we operate; and (ii) $29 million related to proposed IRS tax adjustments for the 2003 through 2006 period that are timing in nature and would be substantially recovered by December 31, 2009.  The above liability for unrecognized tax benefits is reported gross of this recoverable tax asset.  The Company believes it is reasonably possible that our balance of unrecognized tax benefits at September 30, 2009 could be reduced by as much as $34 million over the next twelve months due to possible IRS settlements and the expiration of certain state and local statutes of limitations.

18

MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

12. COMMITMENTS AND CONTINGENCIES

Legal Matters

Marvel, its board of directors and Disney are named as defendants in purported class action lawsuits brought by alleged Marvel stockholders challenging Marvel’s proposed merger with Disney.  The stockholder actions were filed in the Supreme Court of the State of New York, County of New York (Michael Golombuski v. Marvel Entertainment, Inc., et al., filed August 31, 2009 and Alan W. Meerow v. Marvel Entertainment, Inc. et al., filed September 15, 2009) and in the Delaware Court of Chancery (Christine Vlatos v. Sid Ganis, et al., filed September 1, 2009; Paul W. Morand v. Morton F. Handel et al., filed on September 8, 2009; and Port Authority of Allegheny County Retirement and Disability Allowance Plan for Employees Represented by Local 85 of the Amalgamated Transit Union v. Isaac Perlmutter, et al., filed on September 10, 2009).  The stockholder actions generally allege, among other things, that (i) each member of the Marvel board of directors breached his fiduciary duties to Marvel and its stockholders by authorizing the sale of Marvel to Disney, (ii) the merger does not maximize value to Marvel stockholders, (iii) the defendants failed to provide stockholders with allegedly material information related to the proposed transaction and (iv) Disney and Marvel aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Marvel board of directors.  The stockholder actions seek class action certification and equitable relief, including judgments enjoining the defendants from consummating the merger on the agreed-upon terms.  The two actions in the Supreme Court of the State of New York, County of New York were consolidated on October 8, 2009 under the new caption In re: Marvel Entertainment, Inc. Shareholder Litigation.  The Vlatos and Morand actions in the Delaware Court of Chancery were consolidated on October 26, 2009 under the new caption In re: Marvel Entertainment, Inc. Shareholder Litigation.  On October 9, 2009, the plaintiffs filed in the Delaware Court of Chancery a Notice and Proposed Order of Dismissal without prejudice of the action entitled Port Authority of Allegheny County Retirement and Disability Allowance Plan for Employees Represented by Local 85 of the Amalgamated Transit Union v. Isaac Perlmutter, et al.  We believe all claims asserted by the plaintiffs to be without merit.

On January 26, 2009, in the United States District Court for the Southern District of New York, four purported shareholders of Stan Lee Media, Inc. (“SLM”), individually and on behalf of all SLM shareholders, filed a derivative action against several Marvel entities, Isaac Perlmutter (our President and Chief Executive Officer), Avi Arad (a former officer and director), Stan Lee, Joan C. Lee, Joan Lee and Arthur Lieberman.  On April 28, 2009, two of the original four plaintiffs filed an amended complaint, which supersedes the original complaint and alleges only derivative claims on behalf of SLM.  The amended complaint eliminated all claims against Mr. Perlmutter, Mr. Arad, Joan C. Lee and Joan Lee.  The amended complaint alleges that SLM is the owner of rights and property, including the Marvel name and trademarks and rights in characters co-created by Mr. Lee while he was employed by our predecessors (the “Intellectual Property”).  The plaintiffs allege that prior to the date Mr. Lee entered into a new employment agreement with us in 1998, Mr. Lee transferred his interest in the Intellectual Property to a predecessor of SLM.  Mr. Lee has denied that he had any ownership interest in any Marvel intellectual property and that any transfer of those rights to SLM ever took place.  The amended complaint alleges claims against us for violations of section 43(a) of the Lanham Act, tortious interference with a contract between Mr. Lee and an alleged predecessor of SLM, aiding and abetting alleged breaches by Mr. Lee of fiduciary duties owed to SLM and an accounting. The relief sought against us in the amended complaint includes damages in an amount to be determined at trial, and the imposition of a constructive trust on and an accounting for the profits derived from our exploitation of our intellectual property.  We believe all claims in the amended complaint are without merit.

On January 2, 2009, in the New York State Supreme Court, New York County, Marvel and the Joint Venture filed separate actions against MGA Entertainment, Inc. ("MGA").  Those lawsuits alleged that MGA owed several million dollars in unpaid royalties and had otherwise breached license agreements between the parties.  On or about March 2, 2009, MGA filed a separate action against Marvel and Isaac Perlmutter and served counterclaims against the Joint Venture, Marvel and Mr. Perlmutter.  MGA's action and counterclaims assert causes of action for breach of contract, breach of the covenant of good faith and fair dealing, malicious prosecution, abuse of process, and intentional infliction of economic harm.  MGA is seeking damages in excess of $100 million.  We believe all of MGA's claims in the actions are without merit.

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MARVEL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2009

(unaudited)

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

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

13. SUBSEQUENT EVENTS

We have evaluated subsequent events through the filing of this Form 10-Q on November 3, 2009, and determined there have not been any events that have occurred that would require adjustments to our consolidated financial statements or results of operations.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

· Exposure to a continuing economic downturn

· Exposure to a sustained tightening of credit markets

· Dependence on a single distributor to the direct comic book market

· Financial difficulties of licensees

· A decrease in the level of media exposure or popularity of our characters

· Changing consumer preferences

· Movie- and television-production delays and cancellations

· Concentration of our toy licensing in one licensee

· Uncertainties to do with the film production business, such as:

o We might be unable to attract and retain creative talent

o Our key talent might become incapacitated or suffer reputational damage

o Our films might be less successful economically than we anticipate

o Our film productions might be disrupted or delayed

o We might be disadvantaged by changes or disruptions in the way films are distributed

o We might lose potential sales because of piracy of films and related products

o We will be primarily dependent on a single distributor for each film

o We will depend on our studio distributors for information related to the accounting for film-production activities

o We might fail to meet the conditions imposed by the lenders for the funding of individual films

o We might be unable to obtain financing to make more than four films if an interim asset test related to the economic performance of the film slate is not satisfied

o Cash flows from our films might be insufficient to service our debt under the film facility

o The film facility’s lenders might default

The risk factors above are discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

In addition, our forward-looking statements relating to the merger described below are subject to the risks described in Part II, Item 1A of this Quarterly Report on Form 10-Q, beginning on page 42.

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Management Overview of Business Trends

Recent Developments

Proposed Merger with The Walt Disney Company. For information relating to our proposed merger with The Walt Disney Company (“Disney”), please see the discussion under the heading “Description of Business and Principles of Consolidation—Recent Developments—Proposed Merger with The Walt Disney Company” in Note 2 to our condensed consolidated financial statements, which discussion is incorporated herein by reference.

General

We operate in three integrated and complementary operating segments: Licensing, Publishing and Film Production.

Licensing

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

Another strategy of the Licensing segment’s consumer products program is to create new revenue opportunities by further segmenting our properties to appeal to new demographic profiles.  Initiatives such as Marvel Super Hero Squad, Marvel Extreme, Marvel Heroes and Marvel Comics (the retro depiction of our characters) have all helped the licensing business expand beyond its traditional classic and event-driven properties.

Major entertainment events play an important role in driving sales of our licensed products.  In 2008, our Licensing segment revenue reflected the benefit from the release of our self-produced movies; Iron Man, which was released on May 2, 2008, and The Incredible Hulk, which was released on June 13, 2008.  Our full-year 2009 Licensing segment revenue will be lower than in 2008 as there is only one major entertainment event in 2009, X-Men Origins: Wolverine, domestically released May 1, 2009 by Twentieth Century Fox.

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

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

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Publishing

The Publishing segment is focused on strengthening its Super Hero graphic fiction presence in its primary distribution channels such as the direct and mass market, and expanding its reach to a broader demographic by providing all-ages and new reader products in the book market and online.  A variety of Wolverine products were released in the second quarter of 2009 and distributed around the X-Men Origins: Wolverine film domestically released May 1, 2009 by Twentieth Century Fox.  We also released the first collection for The Stand in the first quarter of 2009 and the third collection of the Dark Tower in July 2009.  The first collections for the Ender’s Game and the Ender’s Shadowseries were released in the third quarter of 2009.  In 2008, Marvel launched a major comic book crossover series, Secret Invasion, which involves many of the Marvel characters and features tie-ins to many other Marvel publications.  Secret Invasion ran from April through December 2008.  The third volume of the Dark Tower series and the first volume of The Stand series were released in October 2008.  The momentum of these efforts was followed up with the Dark Reign and Ultimatum publishing events that began in December 2008 and will continue through the remainder of 2009.  Due in part to the economic recession and tightening of credit markets, we believe that Publishing segment revenue in 2009 will be lower than in 2008 as customers’ advertising budgets and consumer spending remain constrained.

The Publishing segment has continued its development and investment in digital media, resulting in increased content on our Marvel Digital Comics Unlimited service, where we currently have over 7,000 previously published Marvel comic books available for viewing online in a proprietary viewer.  We have also added more content to our website, including videos, casual games, news and character biographies.  We also maintain a separate website, www.marvelkids.com, featuring Marvel characters and content developed for children ages 6-11.  Our digital media content is also distributed through arrangements with third-party websites such as YouTube, Xbox Live and iTunes.  We expect continued moderate growth and diversification in digital media revenues as we continue to increase our online presence.  However, our expectations for digital media revenue growth, planned in large part to be achieved through increased advertising revenues, have been reduced because of the current economic climate, which have had a negative impact on industry-wide online advertising.

Film Production

In 2008, we released our first two self-produced films: Iron Man on May 2 and The Incredible Hulk on June 13.  We are currently in postproduction on one film, Iron Man 2, scheduled to be released May 7, 2010, and we are in pre-production on another film, Thor, scheduled to be released May 20, 2011.  In addition, we are developing two other films, The First Avenger: Captain America and The Avengers, scheduled to be released on July 22, 2011 and May 4, 2012, respectively.  After the release of each of our films, we begin to recognize revenue and amortize our film inventory, as described below.

Film Inventory

In general, we are responsible for all of the costs of developing and producing our feature films.  The film’s distributor is responsible for the out-of-pocket costs, charges and expenses (including contingent compensation and residual costs, to a defined limit) incurred in the distribution, manufacturing, printing and advertising, marketing, publicizing and promotion of the film in all media (referred to in the aggregate as the distributor’s costs).  The distributor’s costs are not included in film inventory.

We capitalize all direct film production costs, such as labor costs, visual effects and set construction.  Those capitalized costs, along with capitalized production overhead and capitalized interest costs, appear on our balance sheet as an asset called film inventory.  Production overhead includes allocable costs (including salary benefits and stock compensation) of individuals or departments with exclusive or significant responsibility for the production of films.  Capitalization of production overhead and interest costs commences upon completion of the requirements for funding the production under the film facility and ceases upon completion of the production.

The capitalized costs of projects in development consist primarily of script development and producer costs.  In the event that a film does not begin pre-production within three years from the time of the first capitalized transaction, or if an earlier decision is made to abandon the project, all capitalized costs related to these projects are expensed.

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Once a film is released, using the individual-film-forecast computation method, the amount of film inventory relating to that film is amortized and included in each period’s costs of revenue in the proportion that the film’s revenue during the period bears to the film’s then-estimated total revenue, net of the distributor’s costs, over a period not to exceed ten years (ultimate revenues).  Estimates of ultimate revenues for each film are regularly reviewed and revised as necessary based on the latest available information.  Reductions in those revenue estimates could result in the write-off, or the acceleration of the amortization, of film inventory in that reporting period; increases in those revenue estimates could result in reduced amortization in that period.

As of September 30, 2009, our Film Production segment had unamortized film inventory of $217.4 million, primarily for our film Iron Man 2, which began production in the first quarter of 2009, and Iron Man and The Incredible Hulk, which were completed and released during 2008.

Film Revenue

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

After remitting to us five percent of the film’s gross receipts, the distributor is entitled to retain a fee based upon the film’s gross receipts and to recoup all of its costs on a film-by-film basis prior to our receiving any additional share of film receipts.  Any of the distributor’s costs for a film that are not recouped against receipts for that film are borne by the distributor.  Our share of the film’s receipts, as described above, is recognized as revenue when reported due to us by the distributor.  We received minimum guarantees from local distributors in five territories in connection with the release of Iron Man and The Incredible Hulk.  In those territories, revenue was recognized when the film became available for exhibition in the respective media.

Revenue from the sale of home video units is recognized when our distributors report as due to us the home video sale proceeds that they have collected from retailers.  We provide for future mark-downs and returns of home entertainment product at the time the related revenue is recognized, using estimates.  Our estimates are calculated by analyzing a combination of our distributors’ historical returns and mark-down practices, our distributors’ estimates of returns of our home video units, current economic trends, projections of consumer demand for our home video units and point-of-sale data available from retailers.  We periodically review our estimates using the latest information available.

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

Film Facility

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

· Ant-Man

· Black Panther

· Captain America

· Cloak & Dagger

· Doctor Strange

· Hawkeye

· Iron Man

· Nick Fury

· Power Pack

· Shang-Chi

· The Avengers

· The Incredible Hulk

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

We are currently in pre-production of a movie based on the character Thor and expect to obtain the consent of the film facility lenders to finance and produce that film through the film facility, in which case we will pledge the theatrical film rights to Thor and various related characters as additional collateral to secure the film facility.

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

We fund, from working capital and other sources, the incremental overhead expenses and costs of developing each film to the stage at which the conditions for an initial borrowing for the film are met under the film facility.  If the film’s initial funding conditions are met under the film facility, we are able to borrow up to 67% of our budgeted production costs including an amount equal to our incremental overhead expenses related to that film, but not exceeding 2% of the film’s budget.  If the initial funding conditions are not met, we will be unable to borrow these amounts under the film facility.  Beginning with our third film (Iron Man 2), upon meeting the film’s initial funding conditions, we are required to fund 33% of that film’s budget using non-film production operating cash.  For Iron Man 2, this amount was funded and was all spent on this production as of September 30, 2009.  In 2008, we entered into a studio distribution agreement with Paramount Pictures Corporation under which Paramount agreed to distribute five of our films (extendable to six under certain circumstances) and to provide advertising and marketing efforts for each film.

Critical Accounting Policies

Recent Accounting Standards Adopted in 2009

In June 2009, the FASB issued authoritative guidance (the “Codification”), which was launched on July 1, 2009 and became the single source of authoritative nongovernmental GAAP, superseding existing FASB, AICPA, Emerging Issues Task Force (EITF) and related literature.  The Codification eliminates the GAAP hierarchy and establishes one level of authoritative GAAP.  All other literature is considered non-authoritative.  This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The implementation of this guidance changed how we disclose authoritative accounting pronouncements in the notes to our consolidated financial statements.

In December 2007, the FASB issued authoritative guidance on noncontrolling interests.  The guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements and requires disclosure, on the face of the consolidated statements of income, of the amounts of consolidated net income attributable to the company and to the noncontrolling interests.  This guidance is effective for fiscal years beginning on or after December 15, 2008.  On January 1, 2009, we adopted the provisions of this guidance.  The implementation of this guidance did not have a material impact on our consolidated financial statements or results of operations.  The 2008 financial information has been revised so that the basis of presentation is consistent with the 2009 financial information.

In February 2008, the FASB issued amendments to authoritative guidance on fair value measurements, which deferred the effective date of authoritative guidance on fair value measurements for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.  On January 1, 2009, we adopted these amendments to this authoritative guidance.  On January 1, 2008, we adopted the provisions of this authoritative guidance on fair value measurements related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis.  The implementation of this authoritative guidance and its amendments did not have a material impact on our consolidated financial statements or results of operations.

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In December 2007, the FASB issued authoritative guidance on business combinations.  The guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired and any noncontrolling interest in the acquiree.  This guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination.  This guidance is effective for fiscal years beginning after December 15, 2008.  On January 1, 2009, we adopted this guidance.  The implementation of this guidance did not have any impact on our consolidated financial statements or results of operations.

The FASB issued additional authoritative guidance on business combinations in March 2009, specifically, for the initial recognition and measurement, subsequent measurement, and disclosures of assets and liabilities arising from contingencies in a business combination as well as for pre-existing contingent consideration assumed as part of the business combination.  This guidance was effective as of January 1, 2009.  The implementation of this authoritative guidance did not have any impact on our consolidated financial statements or results of operations.  However, any business combinations entered into in the future may impact our consolidated financial statements as a result of the potential earnings volatility due to the changes described above.

In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes the accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued.  This guidance was effective beginning with our second quarter financial reporting and did not have a material impact on our consolidated financial statements or results of operations (see Note 13).

In April 2009, the FASB amended authoritative guidance on disclosures about the fair value of financial instruments, which was effective for the Company on June 30, 2009.  The amended guidance requires a publicly traded company to include disclosures about fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods.  In addition, the guidance requires an entity to disclose either in the body or in the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position.  The adoption of this amended guidance did not have any impact on our consolidated financial statements or results of operations.

Recent Accounting Standards Not Yet Adopted

In December 2008, the FASB amended authoritative guidance on retirement benefits and provided guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan.  The amended guidance is effective for fiscal years ending after December 15, 2009.  We are currently evaluating the potential impact of this amended guidance on our consolidated financial statements.

In September 2009, the EITF reached a consensus related to revenue arrangements with multiple deliverables.  The consensus will be issued by the FASB as an update to authoritative guidance for revenue recognition and will be effective for the Company on January 1, 2011. The updated guidance will revise how the estimated selling price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-alone value.  In addition, the revised guidance will require additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements.  We are currently evaluating the potential impact of the amended guidance on our consolidated financial statements or results of operations.

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Results of Operations

Three-month period ended September 30, 2009 compared with the three-month period ended September 30, 2008

Net Sales

	Three Months ended September 30,
	2009		2008		% Change
	(dollars in millions)
Licensing	$	48.9	$	58.1		(16	)%
Publishing		32.0		34.0		(6	)%
Film Production		24.8		90.2		(73	)%
All Other		–		0.2		N/A
Total	$	105.7	$	182.5		(42	)%

Our consolidated net sales of $105.7 million for the third quarter of 2009 were $76.8 million lower than net sales in the third quarter of 2008, primarily reflecting decreases in the Film Production segment and Licensing segment net sales.

Licensing segment net sales decreased $9.2 million during the third quarter of 2009, reflecting a $6.7 million decrease in foreign licensing revenue and a $5.8 million decrease in Joint Venture revenue (to $2.4 million) related to the 2007 release of Spider-Man 3.  These decreases were primarily due to the recognition in the third quarter of 2008 of merchandise licensing revenue related to the Iron Man and The Incredible Hulk feature films, as well as a decrease in revenue from the Spider-Man merchandising joint venture.  The third quarter of 2009 Licensing segment net sales included $6.3 million of royalty and service fee revenues from Hasbro compared with $12.0 million included in the third quarter of 2008, a period that benefited from the Summer 2008 releases of Iron Man and The Incredible Hulk movies.  These decreases were partially offset by a $1.9 million increase in Studio licensing revenue, primarily associated with the X-men movie properties.

Net sales from the Publishing segment decreased $2.0 million to $32.0 million for the three months ended September 30, 2009, primarily relating to a $2.7 million decrease in custom publishing sales and a $0.5 million decrease in advertising sales as compared to the same period in 2008.  These decreases were offset by a $1.6 million increase in our sales of trade paperbacks to the book market, as a result of an increase in new titles released during the current quarter.

Net sales from the Film Production segment, related to Iron Man and The Incredible Hulk,decreased $65.4 million to $24.8 million for the three months ended September 30, 2009.  Net sales from the Film Production segment in the third quarter of 2009 primarily reflect the recognition of revenues associated with the international pay TV window for Iron Man and the domestic pay TV window for The Incredible Hulk as well as contributions from DVD sales for both Iron Man and The Incredible Hulk, and, in the third quarter of 2008, reflected theatrical box office revenues from the theatrical release of these films, which were both released in the second quarter of 2008, and the opening of the home video window in certain international pre-sold territories for Iron Man.

Net sales included in 2008 All Other consisted of our then remaining direct toy manufacturing operations, which we exited in early 2008.

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Cost of Revenues

	Three Months ended September 30,
	2009						2008
	Amount			% of Net Segment Sales			Amount			% of Net Segment Sales
	(dollars in millions)
Licensing		$	–		N/A			$	–		N/A
Publishing			15.4		48	%			15.2		45	%
Film Production			20.5		83	%			45.2		50	%
Total		$	35.9		34	%		$	60.4		33	%

Consolidated cost of revenues decreased $24.5 million to $35.9 million for the third quarter of 2009 compared with the third quarter of 2008, primarily reflecting the decrease in amortization of film inventory recorded in our Film Production segment.  Our consolidated cost of revenues as a percentage of sales increased slightly to 34% during the third quarter of 2009 from 33% in the comparable 2008 period as a result of the higher cost of sales associated with our Film Production segment net sales.

Film Production segment cost of revenue consisted of the amortization of film inventory as revenue was generated from the Iron Man and The Incredible Hulk feature films.  Cost of sales as a percentage of net sales increased from 50% in the third quarter of 2008 to 83% in the third quarter of 2009 as a result of the change in revenue mix from these two productions.

Publishing segment cost of revenues for comic book and trade paperback publishing consists of art, editorial, and printing costs.  Publishing segment cost of revenues as a percentage of Publishing segment net sales increased from 45% during the three months ended September 30, 2008 to 48% during the three months ended September 30, 2009.  The increase primarily reflects the impact of rising talent costs, which are independent of the number of units manufactured, along with smaller print runs and the decrease of custom publishing projects, which carry higher margins.

Selling, General and Administrative Expenses

	Three Months ended September 30,
	2009						2008
	Amount			% of Net Segment Sales			Amount			% of Net Segment Sales
	(dollars in millions)
Licensing		$	11.2		23	%		$	17.3		30	%
Publishing			6.2		19	%			6.2		18	%
Film Production			6.7		27	%			4.5		5	%
All Other			9.5		N/A				7.6		N/A
Total		$	33.6		32	%		$	35.6		20	%

Consolidated selling, general and administrative (“SG&A”) expenses of $33.6 million for the third quarter of 2009 were $2.0 million lower than SG&A expenses in the prior-year period, primarily reflecting a decrease of SG&A expenses in the Licensing segment.  This decrease is partially offset by increase in SG&A expenses in the Film Production segment and All Other SG&A.  Consolidated SG&A as a percentage of net sales for the third quarter of 2009 increased to 32% from 20% for the third quarter of 2008, primarily reflecting the significant decrease in consolidated net sales.

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Licensing segment SG&A expenses consist primarily of payroll, agents’ foreign-sales commission and royalties owed to movie studios and talent for their share of merchandise licensing royalty income, which are variable expenses based on licensing revenues.  We pay movie studio licensees up to 50% of merchandising-based royalty revenue (after certain contractually agreed-upon deductions) from the licensing of both “classic” and “movie” versions of characters featured in the films.  Licensing segment SG&A expenses decreased $6.1 million to $11.2 million for the three months ended September 30, 2009 from $17.3 million in the prior-year quarter.  This decrease principally reflects a non-recurring credit of $7.6 million as a result of favorable settlement of a studio licensee audit.  This decrease was partially offset by a $1.8 million charge to write-off certain animation production costs.  As a percentage of Licensing segment net sales, Licensing segment SG&A decreased from 30% to 23%, due to the $7.6 million non-recurring credit discussed above.

Publishing segment SG&A expenses consist primarily of payroll, distribution fees and other general overhead costs, and remained consistent at $6.2 million in the third quarter of 2009 and 2008.  As a percentage of Publishing segment net sales, Publishing segment SG&A increased slightly from 18% to 19%, primarily due to the decrease in Publishing segment net sales as many of our SG&A costs do not vary with increases or decreases in net sales.

SG&A expenses for our Film Production segment consist primarily of employee compensation and overhead expenses associated with our California office.  The costs of marketing and promoting our films are borne by our distributors.  Film Production SG&A expenses increased $2.2 million from the three-month period ended September 30, 2008 to the comparable period in 2009 partially due to an increase in employee headcount and increased facilities cost.  Also included in SG&A expense for both the three-month periods ended September 30, 2009 and 2008 were $1.7 million of write-offs associated with abandoned scripts.

SG&A expenses included in All Other for the third quarter of 2009 increased $1.9 million over 2008, principally reflecting $2.9 million of costs (principally legal fees) we incurred associated with the proposed merger with Disney (see Note 2 to our accompanying condensed consolidated financial statements).  This increase is partially offset by a $0.7 million decrease in employee compensation expense.

Depreciation and Amortization

Depreciation and amortization expense remained consistent at $0.4 million in the third quarter of 2009 and 2008.

Goodwill is not amortized but is subject to annual impairment tests. Our most recent annual impairment review did not result in an impairment charge.

Other Income

Other income of $0.9 million in the third quarter of 2009 includes the receipt of distributions from a litigation trust established in connection with our emergence from bankruptcy proceedings in 1998 and a settlement reached by this trust and other third parties.

Other income in the third quarter of 2008 consisted of settlement payments of $2.0 million from a licensee in connection with a contractual violation, which was partially offset by a $0.4 million charge for the mark-to-market valuation of our interest rate cap associated with the film facility.

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Operating Income

	Three Months ended September 30,
	2009						2008
	Amount			Margin			Amount			Margin
	(dollars in millions)
Licensing		37.5			77	%		42.5			73	%
Publishing		10.2			32	%		12.7			37	%
Film Production		(2.3	)		N/A			40.4			45	%
All Other		(8.8	)		N/A			(7.4	)		N/A
Total		36.6			35	%		88.2			48	%

Consolidated operating income decreased $51.6 million from the prior-year period to $36.6 million for the third quarter of 2009, primarily reflecting a decrease of $40.7 million in gross profit generated by the theatrical releases of Iron Man and The Incredible Hulk movies and a decrease in Licensing segment net sales.

Operating income in the Licensing segment decreased $5.0 million and margins increased 4% from 73% in the third quarter of 2008 to 77% in the comparable quarter of 2009.  This decrease reflects the effects of the $9.2 million decrease in licensing revenue during the third quarter of 2009 due to decreases in foreign licensing and Joint Venture merchandise revenues, and the $7.6 million reduction in SG&A expense for amounts previously accrued.

Operating income in the Publishing segment decreased $2.5 million and margins declined 5% from 37% in the third quarter of 2008 to 32% in the comparable quarter of 2009.  The decrease in operating margin reflects reduced revenue from higher margin custom publishing projects.

Operating income in the Film Production segment decreased $42.7 million, from $40.4 million of operating income in the three months ended September 30, 2008, to $2.3 million of operating loss in the comparable 2009 period.  This decrease principally reflects a decrease of $40.7 million in gross profit generated by the theatrical releases of Iron Man and The Incredible Hulk movies and higher SG&A expenses.

All Other operating costs represent corporate overhead expenses, partially offset by our toy manufacturing operations, which substantially ceased during the first quarter of 2008.  Operating loss in “All Other” for the three-month period ended September 30, 2009, includes $2.9 million of costs (principally legal fees) weincurred associated with the proposed merger with Disney (see Note 2 to our condensed consolidated financial statements).

Interest Expense

	Three Months ended September 30,
	2009			2008
	(dollars in millions)
Interest incurred - film facilities	$	2.9		$	5.7
Less: Interest capitalized		(0.2	)		–
Total	$	2.7		$	5.7

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From the third quarter of 2008 to the third quarter of 2009, there was a $2.8 million decrease in interest costs incurred as a result of a decrease in the outstanding borrowings under our film facility and a more favorable interest rate environment.  In the third quarter of 2009, we capitalized $0.2 million of interest on the amounts borrowed to fund the Iron Man 2 production.  No interest was capitalized in the third quarter of 2008, as there were no films in production during the last half of 2008.  We expect that full-year interest expense for 2009 will be less than 2008 as a result of expected lower outstanding borrowings attributable to self-producing only one film in 2009, for which a substantial portion of the production costs was financed using cash from operations.  We anticipate interest expense on amounts borrowed for production costs will be capitalized through the remainder of the year.

Interest Income

Interest income reflects amounts earned on cash equivalents and short-term investments and restricted cash.  Interest income decreased $0.7 million to $0.2 million in the third quarter of 2009 as compared to the third quarter of 2008, due to lower average cash and investment balances and lower interest rates.

Income Taxes

Our effective tax rates for the three-month periods ended September 30, 2009 (38.6%) and September 30, 2008 (36.4%) were higher than the federal statutory rate due primarily to state and local taxes partially offset by the benefit associated with the earnings of the Joint Venture, as further described below.  The three-month period ended September 30, 2009 includes a charge related to a change in the New York City tax law enacted in the third quarter of 2009 as well as an interest charge on proposed IRS adjustments.

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

Noncontrolling interest

The noncontrolling interest in net income, related to the Joint Venture, amounted to $0.5 million in the three-month period ended September 30, 2009 and $2.1 million in the comparable period of 2008.  This decrease of $1.6 million reflects the decreased operations from licensing associated with Spider-Man 3, which was released in May 2007.

Earnings per Share

Diluted earnings per share attributable to Marvel Entertainment, Inc. decreased to $0.26 in the third quarter of 2009 from $0.64 in the third quarter of 2008, due to a 60% decrease in net income attributable to Marvel Entertainment, Inc.

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Nine-month period ended September 30, 2009 compared with the nine-month period ended September 30, 2008

Net Sales

	Nine Months ended September 30,
	2009		2008		% Change
	(dollars in millions)
Licensing	$	181.5	$	237.5		(24	)%
Publishing		89.5		92.3		(3	)%
Film Production		147.9		119.1		24	%
All Other		–		3.0		N/A
Total	$	418.9	$	451.9		(7	)%

Our consolidated net sales of $418.9 million for the nine-month period ended September 30, 2009 were $33.0 million lower than net sales in the comparable period of 2008, primarily reflecting a decrease of $56.0 million in Licensing segment net sales.  This decrease is partially offset by a $28.8 million increase in Film Production net sales generated by revenues from home video and pay television markets related to Iron Man and The Incredible Hulk.

Licensing segment net sales decreased $56.0 million during the nine-month period ended September 30, 2009, reflecting a $40.6 million decrease in Joint Venture revenue (to $10.3 million), related to Spider-Man 3.  In the nine-month period ended September 30, 2009, royalty and service fee revenue from Hasbro declined $15.6 million to $20.6 million from $36.2 million during the comparable 2008 period primarily due to decreased sales of merchandise based on The Incredible Hulk and Iron Man movie properties.  In addition, there was an $8.3 million decrease in Studio licensing revenue primarily associated with licensed films, principally Spider-Man movie properties.

Net sales from the Publishing segment decreased $2.8 million to $89.5 million for the nine-month period ended September 30, 2009, primarily reflecting a $3.6 million decrease in custom publishing sales that was partially offset by a $1.3 million increase of trade paperbacks to the book market, as a result of an increase in new titles released during the period.

Net sales from the Film Production segment was generated from last year’s second quarter theatrical releases of Iron Man and The Incredible Hulk, and increased $28.8 million to $147.9 million for the nine months ended September 30, 2009.  Net sales in 2009 were primarily from the theatrical box office, home video and pay television markets and, in 2008, primarily from the theatrical box office and pre-sold foreign territory distribution rights of the Iron Man and The Incredible Hulk releases.

Net sales included in 2008 All Other consisted of our then remaining direct toy manufacturing operations, which we exited in early 2008.

Cost of Revenues

	Nine Months ended September 30,
	2009					2008
	Amount		% of Net Segment Sales			Amount		% of Net Segment Sales
	(dollars in millions)
Licensing	$	–		N/A		$	–		N/A
Publishing		43.0		48	%		40.8		44	%
Film Production		110.5		75	%		66.4		56	%
All Other		–		N/A			1.0		33	%
Total	$	153.5		37	%	$	108.2		24	%

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Consolidated cost of revenues increased $45.3 million to $153.5 million for the nine-month period ended September 30, 2009, compared with the nine-month period ended September 30, 2008, primarily reflecting the substantial increase in the amortization of film inventory in our Film Production segment.  As a result, our consolidated cost of revenues as a percentage of sales increased to 37% during the nine-month period ended September 30, 2009, from 24% in the comparable 2008 period.

Publishing segment cost of revenues as a percentage of Publishing segment net sales increased from 44% during the nine-month period ended September 30, 2008 to 48% during the nine-month period ended September 30, 2009.  The increase primarily reflects the impact of rising talent costs, which are independent of the number of units manufactured, along with the impact of smaller print runs, and the decrease of custom publishing projects, which carry higher margins.  In addition, continuing investments in digital media initiatives contributed to this increase.

Film Production segment cost of revenue consisted of the amortization of film inventory and increased $44.1 million to $110.5 million in the 2009 period as significantly more revenue was generated from the Iron Man and The Incredible Hulk feature films.  The film inventory was first amortizedin the second quarter of 2008 as revenue was also then first recognized in the Film Production segment due to release of these films in that quarter.  Cost of sales as a percentage of net sales increased from 56% in the prior year period to 75% in the current year period as a result of the change in revenue mix from these two productions.

Cost of revenues included in 2008 All Other consisted of our then remaining toy production activities.

Selling, General and Administrative Expenses

	Nine Months ended September 30,
	2009					2008
	Amount		% of Net Segment Sales			Amount		% of Net Segment Sales
	(dollars in millions)
Licensing	$	50.6		28	%	$	52.4		22	%
Publishing		18.1		20	%		17.2		19	%
Film Production		13.1		9	%		12.6		11	%
All Other		24.0		N/A			22.0		N/A
Total	$	105.8		25	%	$	104.2		23	%

Consolidated selling, general and administrative (“SG&A”) expenses of $105.8 million for the nine-month period ended September 30, 2009 were slightly higher than SG&A expenses in the prior-year period, primarily reflecting an increase of All Other SG&A.  This increase is partially offset by a decrease in SG&A expenses in the Licensing segment.  Consolidated SG&A as a percentage of net sales increased to 25%, from 23%, for the nine-month period ended September 30, 2009, primarily reflecting the decrease in consolidated net sales.

Licensing segment SG&A expenses of $50.6 million for the nine-month period ended September 30, 2009, decreased $1.8 million from the comparable prior-year period.  This decrease principally reflects a $5.3 million decrease in foreign sales commissions primarily due to a decrease in foreign sales.  This decrease is offset by a $1.8 million charge to write-off certain animation production costs, and an increase in royalties owed to movie studios due to the change in sales mix during the nine-month period ended September 30, 2009, compared with the comparable 2008 period.  As a percentage of Licensing segment net sales, Licensing segment SG&A increased from 22% to 28%, primarily due to the decrease in Licensing segment net sales as many of our SG&A costs do not vary with increases and decreases in net sales.

Publishing segment SG&A expenses increased $0.9 million during the nine-month period ended September 30, 2009 over the comparable period in 2008, reflecting an increase in selling costs related to our digital media initiatives.  SG&A as a percentage of sales for this segment increased slightly from 19% in the prior period to 20% in the current year period.

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Film Production SG&A expenses are consistent in the nine-month period ended September 30, 2009 to the comparable 2008 period.  Included in SG&A expense for both the nine-month periods ended September 30, 2009 and 2008 were $1.7 million of write-offs associated with abandoned scripts.  Film Production segment SG&A as a percentage of Film Production segment net sales decreased from 11% in the nine-month period ended September 30, 2008 to 9% in the comparable period in 2009 as a result of substantially higher Film Production segment net sales in 2009.

SG&A expenses included in All Other for the nine-month period ended September 30, 2009, increased $2.0 million over the comparable period in 2008, principally reflecting $2.9 million of costs (principally legal fees) we incurred associated with the proposed merger with Disney (see Note 2 to our condensed consolidated financial statements).  This increase is partially offset by a $1.0 million decrease in employee compensation expense.

Depreciation and Amortization

Depreciation and amortization expense decreased $0.1 million to $1.1 million in the nine-month period ended September 30, 2009, from $1.2 million in the nine-month period ended September 30, 2008.

Goodwill is not amortized but is subject to annual impairment tests. Our most recent annual impairment review did not result in an impairment charge.

Other Income

Other Income decreased $18.3 million to $4.2 million in the nine-month period ended September 30, 2009, over the comparable 2008 period.

Other income in 2009 principally reflects the receipt of a $3.1 million distribution from a litigation trust established in connection with our emergence from bankruptcy proceedings in 1998 and a settlement reached by this trust and other third parties.

In the 2008 period, we received settlement payments from two interactive licensees in connection with the early termination of their agreements, which resulted in $19.0 million of income, and settlement payments of $2.0 million from a licensee in connection with a contractual violation.

Operating Income

	Nine Months ended September 30,
	2009						2008
	Amount			Margin			Amount			Margin
	(dollars in millions)
Licensing		130.5			72	%		205.4			86	%
Publishing		28.2			32	%		34.3			37	%
Film Production		25.0			17	%		40.6			34	%
All Other		(20.9	)		N/A			(19.4	)		N/A
Total		162.8			39	%		260.9			58	%

Consolidated operating income decreased $98.1 million to $162.8 million for the nine-month period ended September 30, 2009, primarily as a result of the $56.0 million decrease in Licensing segment net sales, which generates the highest margins, and from the recognition of $19.0 million of non-recurring income in the first quarter of 2008 related to licensing settlement payments associated with early contract terminations.  In addition, gross profit generated by the theatrical releases of Iron Man and The Incredible Hulk decreased $15.3 million during the nine-month period ended September 30, 2009 as compared to the corresponding prior year period.

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Operating income in the Licensing segment decreased $74.9 million and operating margin declined to 72% in the nine-month period ended September 30, 2009 from 86% in the comparable period of 2009.  These decreases were primarily the result of the $56.0 million decrease in licensing revenue during the nine-month period ended September 30, 2009, and due to the effect of the $19.0 million licensing settlement payments recorded in the first quarter of 2008.

Operating income in the Publishing segment decreased $6.1 million and operating margin declined from 37% in the nine-month period ended September 30, 2008 to 32% in the comparable period of 2009.  The decrease in operating margin reflects a slight reduction in net sales coupled with a higher cost of sales associated with increases in talent costs, which are independent of the number of units manufactured, along with the impact of smaller print runs, and the decrease of custom publishing sales, which carry higher margin.  In addition, the Publishing segment had increased operating costs associated with the expansion of our digital media initiatives in advance of generating related revenues.

Operating income in the Film Production segment decreased $15.6 million and margins decreased substantially from 34% in the nine-month period ended September 30, 2008, to 17% in the comparable period of 2009.  These decreases principally reflect a decrease of $15.3 million in gross profit generated by the theatrical releases of Iron Man and The Incredible Hulk coupled with the mix of revenue from these productions in 2009 as compared to the comparable period in 2008.

All Other operating costs represent corporate overhead expenses, partially offset in 2009 by $3.1 million of distributions from a litigation trust established in connection with a 1998 bankruptcy-related matter as described above, and in 2008 by our toy manufacturing operations, which we substantially exited in early 2008.

Interest Expense

	Nine Months ended September 30,
	2009			2008
	(dollars in millions)
Interest incurred - film facilities	$	9.4		$	19.3
Less: Interest capitalized		(0.3	)		(5.1	)
Total	$	9.1		$	14.2

Interest expense decreased $5.1 million for the nine-month period ended September 30, 2009 to the comparable 2008 period.  The decrease is attributable to a decrease of $9.9 million of interest cost incurred, partially offset by a $4.8 million decrease of capitalized interest.  The reduction in interest cost is a result of the partial repayment of our outstanding borrowings under our film facility using cash proceeds received from Iron Man and The Incredible Hulk films and a reduction in our cost of debt capital.  The reduction in capitalized interest is attributable to a decrease of in-production film inventory costs resulting from producing two films in the nine-month period ended September 30, 2008 as compared to production of one film in the comparable 2009 period.  We expect that full-year interest expense for 2009 will be less than 2008 as a result of expected lower outstanding borrowings attributable to self-producing only one film in 2009, for which a substantial portion of production costs was financed using cash from operations.  In addition, interest expense on amounts borrowed for production costs will be capitalized through the remainder of the year.  During 2008, we did not capitalize interest during the last half of the year, as we had no films in production during that time.

Interest Income

Interest income reflects amounts earned on cash equivalents and short-term investments. Interest income decreased $2.3 million to $0.5 million in the nine-month period ended September 30, 2009 as compared to the comparable period in 2008, due to lower average cash and investment balances and lower interest rates.

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Income Taxes

Our effective tax rate (37.6%) for both the nine-month periods ended September 30, 2009 and 2008, was higher than the federal statutory rate due primarily to state and local taxes partially offset by the benefit associated with the earnings of the Joint Venture, as further described below.  The nine-month period ended September 30, 2009 includes a charge related to a change in the New York City tax law enacted in the third quarter of 2009 as well as an interest charge on proposed IRS adjustments.

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

Noncontrolling interest

The noncontrolling interest in net income, related to the Joint Venture, amounted to $2.3 million in the nine-month period ended September 30, 2009 and $14.4 million in the comparable period of 2008.  This decrease of $12.1 million reflects the decreased operations from licensing associated with Spider-Man 3, which was released in May 2007.

Earnings per Share

Diluted earnings per share attributable to Marvel Entertainment, Inc. decreased from $1.81 in the nine-month period ended September 30, 2008 to $1.20 in the comparable 2009 period, as net income attributable to Marvel Entertainment, Inc. declined by 34%.

Liquidity and Capital Resources

Our primary sources of liquidity are cash, cash equivalents, cash flows from operations, our film credit facility and the HSBC line of credit, described below.  We anticipate that our primary uses for liquidity will be to conduct our business, including the funding of our self-produced animation and our obligation to fund 33% of the budget of each of our prospective self-produced films as well as certain reserves, which commenced with Iron Man 2 in 2009.

Net cash provided by operating activities increased $33.8 million to $220.6 million during the nine months ended September 30, 2009, compared to $186.8 million during the comparable prior-year period.  This increase was primarily due to strong cash collections of home video revenue related to the Iron Man and The Incredible Hulk movies in our Film Production segment and from strong cash collections from our Licensees.  Our film-production expenditures, including expenditures funded by draw-downs from our film facilities, appear on our accompanying consolidated statements of cash flows as cash used in operating activities.  The related draw-downs appear on our accompanying condensed consolidated statements of cash flows as cash provided by financing activities.  Likewise, cash collections from our film productions are reflected in cash provided by operating activities; however, the related increase in restricted cash funded by these collections is reflected as cash used in our investing activities.

Our working capital increased $77.9 million, from a $57.7 million working capital deficiency at December 31, 2008 to working capital of $20.2 million at September 30, 2009.  This improvement primarily reflects the cash generated from our film production and licensing operations noted above, which allowed us to reduce our current film facility debt by $204.8 million.

Net cash flows used in investing activities for the nine months ended September 30, 2009 primarily reflect the funding of restricted cash for the completion bond escrow (described below) and other required reserves, substantially offset by the sale of short-term investments.  Net cash flows provided by investing activities for the nine months ended September 30, 2008 reflect the sale of short-term investments that were partially offset by the purchase of those investments using our excess cash.

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Net cash used in financing activities during the nine months ended September 30, 2009 reflects $224.5 million in repayments of, and $33.0 million of borrowings from, our film facility.  In addition, we repurchased 0.7 million shares of our common stock at a cost of $16.4 million.  During the nine months ended September 30, 2008, we repurchased 0.4 million shares of our common stock at a cost of $9.9 million.  Repurchases were financed through cash generated from operations.  At September 30, 2009, the remaining amount authorized and available for stock repurchases was $111.3 million.  However, under the terms of our merger agreement with Disney, we are not permitted to repurchase our common stock.  Net cash used in financing activities during the nine months ended September 30, 2008 also reflects repayments of, and borrowings from, our film facilities.

MVL Film Finance LLC maintains a $525 million credit facility for producing theatrical motion pictures based on our characters.  Our ability to borrow under the film facility expires on September 1, 2012.  We are required to repay all borrowings under the film facility by September 1, 2014, subject to extension by up to ten months under certain circumstances.  The film facility’s final expiration date is September 1, 2016, subject to extension by up to ten months under certain circumstances.  The expiration date and final date for borrowings under the film facility occur sooner if the films produced under the facility fail to meet certain defined performance measures.  The film facility consists of $465 million in revolving senior bank debt and $60 million in mezzanine debt, which is subordinated to the senior bank debt and, as discussed below, was repurchased by us.  Both Standard & Poor’s, a division of the McGraw-Hill Companies, Inc., and Moody’s Investor Rating Service, Inc. have given the senior bank debt investment grade ratings.  In addition, Ambac Assurance Corporation has insured repayment of the senior bank debt.  In exchange for the repayment insurance, we pay Ambac a fee calculated as a percentage of used and unused senior bank debt, but in no event less than $3.4 million per year.  The interest rates for outstanding senior bank debt, and the fees payable on unused senior bank debt capacity, both described below, include the percentage fee owed to Ambac (without consideration of that fee’s minimum).  During 2008, our wholly-owned subsidiary, MVL International C.V. repurchased all $60 million of the mezzanine debt for $58.1 million.  The mezzanine debt remains outstanding and MVL International C.V. receives the interest payments made by MVL Film Finance LLC with respect to this debt.  The interest expense and interest income related to the mezzanine debt are therefore eliminated in our consolidated results and our consolidated financial position does not include the mezzanine debt.

All future debt service under the film facility must now be paid from the films’ net collections, rather than from any of our other sources of cash.  Since December 31, 2008, the film facility has required us to maintain a liquidity reserve of $25 million, included in non-current restricted cash, to cover future debt service in the event that the films’ net collections are not sufficient to make these payments.  If we do not release a film in 2010, 2011 and 2012 or our sixth film under the facility by August 26, 2012, the liquidity reserve requirement will be increased to $45 million.

The film facility also requires us to maintain an interest reserve equal to the subsequent quarter’s estimated interest.  As of September 30, 2009, this reserve was $2.9 million, and is included in non-current restricted cash.

The interest rate for the mezzanine debt is LIBOR plus 7.0%.  As noted above, we repurchased the mezzanine debt.  Accordingly, from the dates of repurchase, interest expense related to the mezzanine debt is not reflected in our consolidated operating results.

The interest rate for outstanding senior bank debt is currently LIBOR (0.29% at September 30, 2009) or the commercial paper rate, as applicable, plus 2.935%.  The LIBOR rate on our outstanding senior bank debt resets to the quoted LIBOR rate two business days preceding the commencement of each calendar quarter.  The commercial paper rate resets periodically depending on how often our lenders issue commercial paper to fund their portion of our outstanding debt.  The weighted average interest rate of our senior bank debt was 3.28% at September 30, 2009.

The film facility requires us to pay a fee on any senior bank debt capacity that we are not using.  This fee is currently 0.90%, and is applied on $465 million reduced by the amount of any outstanding senior bank debt.

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In June 2008, Ambac’s rating was downgraded by S&P from AAA to AA.  The downgrade caused an increase of 1.30% in our interest rate for outstanding senior bank debt and an increase of 0.30% in the fee payable on our unused senior bank debt capacity.  These increases are reflected in the rates noted above.  Downgrades of Ambac’s rating after the June 2008 downgrade do not further affect our rate of interest or fees under the film facility.

If the senior bank debt’s rating (without giving effect to Ambac’s insurance) by either S&P or Moody’s were to fall below investment grade, the interest rate for the outstanding senior bank debt would increase by up to an additional 0.815%.  In addition, if the ratio of our indebtedness, excluding the film facility, to our total capital, defined as our consolidated equity plus indebtedness excluding film facility indebtedness was to exceed 0.4 to 1.0, then the interest rate for outstanding senior bank debt could increase by up to an additional 0.50%.  In light of recent adverse developments in the credit markets, we have assessed the economic impact on our film production activities from the actual and potential increases in interest rates described above.  We do not believe the actual or potential impact from these rate increases to be material.

The film facility requires the maintenance of a minimum tangible net worth, a prospective cash coverage test, an historical cash coverage test and an asset coverage ratio, each measured quarterly, and compliance with various administrative covenants.  We have maintained compliance with all required provisions of the film facility since its inception.

Until recently, we would also have been required, before our fifth film’s funding, either to obtain a cumulative, minimum budget percentage (33%) from our pre-sales of film distribution rights in Australia and New Zealand, Japan, Germany, France and Spain (the “Reserved Territories”), together with the proceeds of any government rebate, subsidy or tax incentive and any other source of co-financing, or to fund that budget percentage with cash generated by operations other than films (the “Pre-Sales Test”).  The Pre-Sale Test has now been effectively subsumed by other terms of the film facility, as explained below.  Future distribution in the Reserved Territories will be handled by Paramount, with limited exceptions.

The film facility requires us to fund 33% of the budget of each film distributed under our 2008 agreement with Paramount.  The film facility will provide up to 67% of the budget (reduced by the proceeds of any third-party co-financing).  After deduction of Paramount’s distribution fees and expenses in the Reserved Territories, we will be entitled to recoup our 33% contribution from all film proceeds from the Reserved Territories.  Our recoupment will be crossed among all films distributed under the distribution agreement with Paramount (five films, extendable to six under certain circumstances) and among all Reserved Territories.  After recoupment of our 33% contribution, all additional film proceeds from the Reserved Territories will be used to pay down borrowings under the film facility.

In the first quarter of 2009, we amended the film facility to allow us, at our option, to utilize a lower cost completion bond structure.  In order to take advantage of this lower cost structure for Iron Man 2, we funded into escrow approximately $31.5 million for that film for the duration of production.  Upon delivery of the completed film, the escrowed funds will be returned to us.  However, the amount of escrowed funds returned to us will be reduced to the extent that the cost of the film exceeds 110% of its budget.

If one of the banks in our film facility’s lending consortium were to default in making a required funding and if we were unable to arrange for a replacement bank, the amount available to us under the film facility would drop by the amount of the defaulting bank’s unused commitment and our film productions could be disrupted as a result.

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We maintain a $100 million revolving line of credit with HSBC Bank USA, National Association (the “HSBC Line of Credit”) with a sub-limit for the issuance of letters of credit.  The HSBC Line of Credit, as amended, expires on March 31, 2011.  Borrowings under the HSBC Line of Credit may be used for working capital and other general corporate purposes and for repurchases of our common stock.  In March 2009, the HSBC Line of Credit was amended and now provides for an unused commitment fee of 0.45% commencing April 1, 2009.  The HSBC Line of Credit contains customary event-of-default provisions and a default provision based on our market capitalization.  We continue to be in compliance with the covenants of the facility, which address net income, leverage and free cash flow.  The HSBC Line of Credit is secured by a lien on (a) our accounts receivable, (b) our rights under our toy license with Hasbro and (c) all of our treasury stock repurchased by us after November 9, 2005.  Borrowings under the HSBC Line of Credit bear interest at HSBC’s prime rate or, at our option, at LIBOR plus 1.25% per annum.  As of September 30, 2009, we had $1.1 million (related to a letter of credit) outstanding under the HSBC Line of Credit.

Our capital expenditures for the nine months ended September 30, 2009 and 2008 were $2.2 million and $0.4 million, respectively.  We do not expect to have significant capital expenditures for the balance of 2009.  Capital expenditures do not include film costs, which we capitalize into film inventory.

We believe that our cash and cash equivalents, cash flows from operations, the film facility, and the HSBC line of credit will be sufficient for us to conduct our business, including the funding of our self-produced animation and our obligation to fund 33% of the budget of each of our prospective self-produced films as well as certain reserves.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, we hold bank deposits denominated in various currencies, which subjects us to currency rate fluctuation risk.  A substantial portion of our international licenses are denominated in U.S. dollars, which insulates us from currency rate fluctuation risk on the minimum payments under those licenses.  Currency fluctuations do affect, however, the value in U.S. dollars of sales of underlying licensed products in local currencies and therefore affect the rate at which minimum guarantees are earned out and the extent to which we receive overages on those licenses.  Further, our international licenses that are denominated in foreign currencies subject us to currency rate fluctuation risk with respect to both minimum payments and overages.  We believe that the impact of currency rate fluctuations do not represent a significant risk in the context of our current international operations.

In connection with our film facility, to mitigate our exposure to rising interest rates based on LIBOR, we entered into an interest rate cap to cover a majority of the notional amount of anticipated borrowings under this facility.  We do not generally enter into any other types of derivative financial instruments in the normal course of business to mitigate our interest rate risk, nor are such instruments used for speculative purposes.  In light of recent adverse developments in the credit markets, we have assessed the economic impact on our film production activities from the actual and potential increases in our film facility interest rates because of downgrades by S&P or Moody’s.  We do not believe the impact of these actual or potential increases to be material.

The continued current volatility and disruption to the capital and credit markets are causing contraction in the availability of business and consumer credit and has led to a global recession.  This current decrease and any future decreases in economic activity in the United States or other regions in the world in which we do business could significantly and adversely affect our future results of operations and financial condition in a number of ways.  These economic conditions could reduce the performance of our theatrical and home entertainment releases, the ability of licensees to produce and sell our licensed consumer products and the demand for our publications, thereby reducing our revenues and earnings, and could cause our licensees to be unable or to refuse to make required payments to us under their license agreements.

Additional information relating to our outstanding financial instruments is included in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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ITEM 4.   CONTROLS AND PROCEDURES

Marvel’s management has evaluated, with the participation of Marvel’s chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter covered by this report.  Based on that evaluation, our chief executive officer and chief financial officer have concluded that those controls and procedures were effective at the end of the fiscal quarter covered by this report.  There were no changes in our internal control over financial reporting identified by us that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.       OTHER INFORMATION

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ITEM 1. LEGAL PROCEEDINGS

The information required by Part II, Item 1 is incorporated herein by reference to the information appearing under the caption “Legal Matters” in Note 12 to the Condensed Consolidated Financial Statements in Part I hereof, beginning on page 19.

ITEM 1A.  RISK FACTORS

Marvel and its stockholders are exposed to several risks relating to the planned merger between Marvel and Disney, including the following:

· Although Disney and Marvel expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of various challenges.

· The issuance of shares of Disney common stock to Marvel stockholders in the merger will initially have a negative impact on the earnings per share of the combined company and will decrease the proportionate voting power of each share of Disney common stock.

· The price of Disney common stock may decline, which would decrease the value of the total merger consideration to be received by Marvel stockholders in the merger, based on the decline in the value of the Disney common stock to be received and, in certain circumstances, the resulting adjustments to the exchange ratio and per share cash consideration.

· Disney and Marvel may be unable to obtain the regulatory approvals required to complete the merger.

· The merger agreement limits Marvel’s ability to pursue alternatives to the merger.

· Certain directors and executive officers of Marvel have interests in the merger that may be different from, or in addition to, the interests of Marvel stockholders.

· The market price of Disney common stock after the merger may be affected by factors different from those currently affecting the shares of Disney or Marvel.

· The announcement and pendency of the merger could have an adverse effect on Marvel’s stock price, business, financial condition, results of operations or business prospects.

· Failure to complete the merger could negatively impact the stock price and the future business and financial results of Marvel.

· Several lawsuits have been filed against Marvel, the members of the Marvel board of directors, Disney and certain subsidiaries of Disney challenging the merger, and an adverse judgment in such lawsuits may prevent the merger from becoming effective or from becoming effective within the expected timeframe.

Each of the risks mentioned above is described in detail in Amendment No. 1 to the Form S-4 filed by Disney with the Securities and Exchange Commission on October 27, 2009 (the “Disney S-4”), under the heading “RISK FACTORS – Risk Factors Related to the Merger.”

In addition, in the event that the merger is consummated, Marvel stockholders who continue to hold the Disney stock they receive as merger consideration will be subject to the risks related to Disney described in the Disney S-4 under the heading “RISK FACTORS – Risk Factors Related to Disney.”

Other than as described above in this section, there have been no material changes in our risk factors from those disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

ITEM 6. EXHIBITS

For the exhibits filed with this report, see the exhibit index below.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MARVEL ENTERTAINMENT, INC.
(Registrant)
By:	/s/ Kenneth P. West
	Kenneth P. West
	Chief Financial Officer (duly authorized officer and principal financial officer)

Dated: November 3, 2009

EXHIBIT INDEX

Exh. No.	Description
2.1	Agreement and Plan of Merger, by and among The Walt Disney Company, Maverick Acquisition Sub, Inc., Maverick Merger Sub, LLC and Marvel Entertainment, Inc., dated as of August 31, 2009.(1)
4.1	Amendment No. 3 to Rights Agreement, dated as of August 31, 2009, by and between Marvel Entertainment, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (1)
10.1	Voting Agreement, dated as of August 31, 2009, by and among The Walt Disney Company, Marvel Entertainment, Inc., Isaac Perlmutter, Object Trading Corp., Zib, Inc. and the Isaac Perlmutter Trust 01/28/1993.(1)
10.2	Amendment to Executive Employment Agreement, dated as of August 31, 2009, between Marvel Entertainment, Inc. and Marvel Characters B.V., on the one hand, and Isaac Perlmutter, on the other.(1)
10.3	Amendment to Employment Agreement, dated as of August 31, 2009, between Marvel Entertainment, Inc. and John Turitzin.(1)
10.4	Amendment to Employment Agreement, dated as of August 31, 2009, between Marvel Entertainment, Inc. and Kenneth P. West.(1)
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act.
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act.
32	Certification by Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act.

(1) Incorporated by reference to same number exhibit to Marvel’s Form 8-K filed on September 4, 2009.

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