10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2006

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 001-05647

MATTEL, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-1567322
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

333 Continental Blvd.

El Segundo, CA 90245-5012

(Address of principal executive offices)

(310) 252-2000

(Registrant’s telephone number)

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

Title of each class	Name of each exchange on which registered
Common Stock, $1.00 par value	New York Stock Exchange, Inc.

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

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  x    No  ¨

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  ¨

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

Large accelerated filer  x                    Accelerated filer  ¨                    Non-accelerated filer  ¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant calculated using the market price as of the close of business June 30, 2006 was $6,276,702,226.

Number of shares outstanding of registrant’s common stock, $1.00 par value, as of February 23, 2007:

393,171,940 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Mattel, Inc. 2007 Notice of Annual Meeting of Stockholders and Proxy Statement, to be filed with the Securities and Exchange Commission (“SEC”) within 120 days after the close of the registrant’s fiscal year (incorporated into Parts II and III).

MATTEL, INC. AND SUBSIDIARIES

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
	PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 8.	Financial Statements and Supplementary Data	56
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	101
Item 9A.	Controls and Procedures	101
Item 9B.	Other Information	101
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance of the Registrant	102
Item 11.	Executive Compensation	102
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	102
Item 13.	Certain Relationships and Related Transactions, and Director Independence	102
Item 14.	Principal Accountant Fees and Services	102
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	103
	Signature	114

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PART I

Item 1.    Business.

Mattel, Inc. (“Mattel”) designs, manufactures, and markets a broad variety of toy products worldwide through sales to its customers and directly to consumers. Mattel’s vision is to provide “the world’s premier toy brands—today and tomorrow.” Management has set six key company strategies: (i) improve execution of the existing toy business; (ii) globalize the brands; (iii) extend the brands into new areas; (iv) catch new trends, create new brands and enter new categories; (v) develop people; and (vi) improve productivity, simplify processes and maintain customer service levels.

Mattel believes its products are among the most widely recognized toy products in the world. Mattel’s portfolio of brands and products are grouped in the following categories:

Mattel Girls & Boys Brands—including Barbie^® fashion dolls and accessories (“Barbie^®”), Polly Pocket!^™, Pixel Chix^™,Winx Club^™ and Disney Classics (collectively “Other Girls Brands”), Hot Wheels^®, Matchbox^® and Tyco^® R/C vehicles and playsets (collectively “Wheels”) and Batman^™, CARS^™, Superman^™, Radica:^® products, and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands—including Fisher-Price^®, Little People^®, BabyGear^™ and View-Master^® (collectively “Core Fisher-Price^®”), Sesame Street^®, Dora the Explorer^™, Go-Diego-Go!^™, Winnie the Pooh, InteracTV^™ and See ‘N Say^® (collectively “Fisher-Price^® Friends”) and Power Wheels^®.

American Girl Brands—including Just Like You^™, the historical collection and Bitty Baby^®. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers.

Mattel was incorporated in California in 1948 and reincorporated in Delaware in 1968. Its executive offices are located at 333 Continental Blvd., El Segundo, California 90245-5012, telephone number (310) 252-2000.

Business Segments

“Mattel” refers to Mattel, Inc. and its subsidiaries as a whole, unless the context requires otherwise. This narrative discussion applies to all segments except where otherwise stated. Mattel’s reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US and American Girl Brands.

On October 10, 2005, Mattel announced the consolidation of its domestic Mattel Girls & Boys Brands and Fisher-Price Brands divisions into one division. The creation of the “Mattel Brands” division, which resulted in the consolidation of some management and support functions, preserves the natural marketing and design groups that are empowered to create and market toys based on gender and age groups and is expected to more effectively and efficiently leverage Mattel’s scale. These changes are consistent with Mattel’s ongoing goals to enhance innovation and improve execution. In connection with this consolidation, Mattel executed an initiative in 2006 to streamline its workforce, primarily in El Segundo, California. The consolidation of these divisions did not change Mattel’s operating segments.

Management believes that the business environment for Mattel for 2007 will be similar to that of 2006. Mattel expects to continue facing challenges both domestically and internationally as retailers continue to tightly manage inventory. Additionally, Mattel has experienced continued cost pressures in the areas of product costs, including oil-based resin and zinc, and employee-related costs. Management believes that Mattel will continue to encounter a challenging retail environment, along with cost pressures and the possibility of sales declines in the Barbie^® brand.

For additional information on Mattel’s operating segment reporting, including revenues, segment income and assets, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of

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Operations—Results of Operations—Operating Segment Results” and Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.” For additional information regarding geographic areas, see Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.” For a discussion of the risks inherent in the foreign operations of Mattel, which affect each segment, see Item 1A “Risk Factors—Factors That May Affect Future Results.”

Domestic Segment

The Domestic segment develops toys that it markets and sells through the Mattel Girls & Boys Brands US, Fisher-Price Brands US and American Girl Brands segments.

In the Mattel Girls & Boys Brands US segment, Barbie^® includes brands such as Barbie^® fashion dolls and accessories, My Scene^™, and Barbie^® Collector. Polly Pocket!^™, Pixel Chix^™, Winx Club^™, and Disney Classics are included within Other Girls Brands. Wheels is comprised of Hot Wheels^®, Matchbox^®, and Tyco^® R/C vehicles and playsets. Entertainment includes Batman^™, CARS^™, Justice League^™, MegaMan^™, Superman^™, Yu-Gi-Oh!^™, and Radica:^® products, as well as games and puzzles.

In 2007, Mattel expects to introduce new products, including continuing to leverage content within its core brands. In the Mattel Girls Brands category, new product introductions include full-length animated launches of Barbie^® in Fairytopia^™ III: Magic of the Rainbow^™ in spring 2007, and Barbie^® as The Island Princess^™ in fall 2007. Polly Pocket!^™ will be expanding into new categories in 2007, with the introduction of Polly^® Fliers and the Polly^® Jet. In the Wheels category, Hot Wheels^® will launch an all-new track set strategy, including new Flip N Go^™ “No Assembly” sets. In the Entertainment category, Mattel will expand on the success of CARS^™ and Scene It?^™ brands, and introduce new products including toys and games from Disney’s Ratatouille movie in summer 2007. Mattel’s Radica:^® products will expand on the success of 20Q^™ and Girl Tech^® brands with new releases, and add U.B. FUNKEYS^™, an all new platform in 2007.

The Fisher-Price Brands US segment includes Fisher-Price^®, Little People^®, Rescue Heroes^®, BabyGear^™, View-Master^®, Sesame Street^®, Dora the Explorer^™, Go-Diego-Go!^™, Winnie the Pooh, InteracTV^™, See ‘N Say^®, and Power Wheels^®. New product introductions for 2007 are expected to include the Smart Cycle^™, Digital Arts & Crafts Studio, Laugh & Learn^™ Kitchen, Rainforest^™ Bouncer, T.M.X.^™ Friend Ernie, T.M.X.^™ Friend Cookie Monster, Dora’s Let’s Get Ready Vanity^™, I Can Play^™ Guitar, and Diego’s Mobile Rescue Unit.

The American Girl Brands segment is a direct marketer, children’s publisher and retailer best known for its flagship line of historical dolls, books and accessories, as well as the Just Like You^™ and Bitty Baby^® brands. American Girl Brands also publishes best-selling Advice & Activity books and the award-winning American Girl^® magazine. In January 2007, American Girl introduced Nicki^™, the newest Girl of the Year doll. In addition, American Girl is launching American Girl Boutique and Bistro^™, a new experiential retail concept, in Dallas, Texas and Atlanta, Georgia in mid-to-late 2007, and a new historical doll in September 2007. American Girl Brands products are sold only in the US and Canada.

International Segment

Products marketed by the International segment are generally the same as those developed and marketed by the Domestic segment, with the exception of American Girl Brands, although some are developed or adapted for particular international markets. Mattel’s products are sold directly to retailers and wholesalers in most European, Latin American and Asian countries, and in Australia, Canada and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence.

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Mattel’s International segment revenue represented 44% of worldwide consolidated gross sales in 2006. Within the International segment, Mattel operates in four regions that generated the following gross sales during 2006 (in millions):

	Amount		Percentage of International Gross Sales
Europe	$	1,544.5	56	%
Latin America		739.9	27
Asia Pacific		239.6	9
Other		215.0	8
	$	2,739.0	100	%

No individual country within the International segment exceeded 6% of worldwide consolidated gross sales during 2006.

The strength of the US dollar relative to other currencies can significantly affect the revenues and profitability of Mattel’s international operations. Mattel enters into foreign currency forward exchange and option contracts, primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies, to limit the effect of exchange rate fluctuations on its results of operations and cash flows. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Item 8 “Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements.” For financial information by geographic area, see Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.”

Manufacturing and Materials

Mattel manufactures toy products for all segments in both company-owned facilities and through third-party manufacturers. Products are also purchased from unrelated entities that design, develop and manufacture those products. To provide greater flexibility in the manufacture and delivery of its products, and as part of a continuing effort to reduce manufacturing costs, Mattel has concentrated production of most of its core products in company-owned facilities and generally uses third-party manufacturers for the production of non-core products.

Mattel’s principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia and Mexico. Mattel also utilizes third-party manufacturers to manufacture its products in the US, Mexico, Brazil, Asia, India, New Zealand, and Australia. To help avoid disruption of its product supply due to political instability, civil unrest, economic instability, changes in government policies and other risks, Mattel produces many of its key products in more than one facility. Mattel believes that the existing production capacity at its own and its third-party manufacturers’ manufacturing facilities is sufficient to handle expected volume in the foreseeable future. See Item 1A “Risk Factors—Factors That May Affect Future Results.”

Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research and current market information. Actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess inventory in a particular product line.

The foreign countries in which most of Mattel’s products are manufactured (principally China, Indonesia, Thailand, Malaysia and Mexico) all enjoy permanent “normal trade relations” (“NTR”) status under US tariff laws, which provides a favorable category of US import duties. China’s NTR status became permanent in 2002,

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following enactment of a bill authorizing such status upon the country’s accession to the World Trade Organization (“WTO”), which occurred in 2001. Membership in the WTO substantially reduces the possibility of China losing its NTR status, which would result in increased costs for Mattel and others in the toy industry.

All US duties on toys were completely eliminated upon implementation of the Uruguay Round WTO agreement in 1995. The European Union, Japan and Canada eliminated their tariffs on most toy categories through staged reductions that were completed by January 1, 2004. The primary toy tariffs still maintained by these countries are European Union and Japanese tariffs on dolls of 4.7% and 3.9%, respectively, and a Canadian tariff of 8.0% on children’s wheeled vehicles.

The majority of Mattel’s raw materials is available from numerous suppliers but may be subject to fluctuations in price.

Competition and Industry Background

Competition in the manufacture, marketing, and sale of toys is based primarily on quality, play value and price. Mattel offers a diverse range of products for children of all ages and families that includes, among others, toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, hand-held and other games, puzzles, educational toys, media-driven products and fashion-related toys. The Mattel Girls & Boys Brands US and Fisher-Price Brands US segments compete with several large toy companies, including Bandai, Hasbro, Inc., Jakks Pacific, Leap Frog, Lego, MGA Entertainment, and VTech, many smaller toy companies and several manufacturers of video games and consumer electronics. American Girl Brands competes with companies that manufacture girls’ toys and with children’s book publishers and retailers. Mattel’s International segment competes with global toy companies including Bandai, Hasbro, Lego, Tomy, and MGA Entertainment, and other national and regional toy companies and manufacturers of video games and consumer electronics. Foreign regions may include competitors who are strong in a particular toy line or geographical area, but do not compete with Mattel and other international toy companies worldwide.

Competition among the above companies is intensifying due to recent trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing toys at younger ages and an increasing use of high technology in toys. In addition, a small number of retailers account for an increasingly large number of toy sales, control the shelf space from which toys are viewed, and have direct contact with parents and children through in-store purchases, coupons, and print advertisements. Such retailers can and do promote their own private-label toys, facilitate the sale of competitors’ toys, and allocate shelf space to one type of toys over another.

Seasonality

Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases during the traditional holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters of Mattel’s fiscal year in anticipation of such holiday buying. These seasonal purchasing patterns and requisite production lead times cause risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly in recent years, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be able to meet demand for certain products at peak demand times, or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly from period to period.

In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three

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quarters of its fiscal year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements. See “Seasonal Financing.”

Product Design and Development

Through its product design and development group, Mattel regularly refreshes, redesigns and extends existing toy product lines and develops innovative new toy product lines for all segments. Mattel believes its success is dependent on its ability to continue this activity effectively. See Item 1A “Risk Factors—Factors That May Affect Future Results.” Product design and development activities are principally conducted by a group of professional designers and engineers employed by Mattel. During 2006, 2005 and 2004, Mattel spent $173.5 million, $182.0 million and $171.3 million, respectively, in connection with the design and development of products, exclusive of royalty payments. See Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements.”

Additionally, independent toy designers and developers bring concepts and products to Mattel and are generally paid a royalty on the net selling price of products licensed to Mattel. These independent toy designers may also create different products for other toy companies.

Advertising and Marketing

Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes place at varying levels throughout the year and peaks during the traditional holiday season. Advertising includes television and radio commercials, and magazine and newspaper advertisements. Promotions include in-store displays, sweepstakes, merchandising materials and major events focusing on products and tie-ins with various consumer products companies.

During 2006, 2005 and 2004, Mattel incurred $651.0 million (11.5% of net sales), $629.1 million (12.1% of net sales) and $643.0 million (12.6% of net sales), respectively, on advertising and promotion.

Sales

Mattel’s products are sold throughout the world. Products within the Domestic segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers by Mattel Girls & Boys Brands US and Fisher-Price Brands US. Mattel also operates several small retail outlets, generally near or at its corporate headquarters and distribution centers as a service to its employees and as an outlet for its products. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers. Mattel has three retail stores, American Girl Place^® in Chicago, Illinois, New York, New York, and Los Angeles, California, each of which features children’s products from the American Girl Brands segment. In April 2006, the third American Girl Place^® retail store opened in Los Angeles, California. American Girl Brands also has a retail outlet in Oshkosh, Wisconsin that serves as an outlet for excess product. Products within the International segment are sold directly to retailers and wholesalers in Canada and most European, Asian and Latin American countries, and through agents and distributors in those countries where Mattel has no direct presence. Mattel also has retail outlets in Latin America and Europe as an outlet for its products. Additionally, Mattel sells certain of its products online through its website.

During 2006, Mattel’s three largest customers (Wal-Mart at $1.1 billion, Toys “R” Us at $0.8 billion and Target at $0.5 billion) accounted for approximately 43% of worldwide consolidated net sales in the aggregate. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the US. The customers and the degree of concentration vary depending upon the region or

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nation. See Item 1A “Risk Factors—Factors That May Affect Future Results” and Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.”

Licenses and Distribution Agreements

Mattel has license agreements with third parties that permit Mattel to utilize the trademark, characters or inventions of the licensor in products that Mattel sells. A number of these licenses relate to product lines that are significant to Mattel’s business and operations.

Mattel has entered into agreements to license entertainment properties from, among others, Disney Enterprises, Inc. (including Disney characters such as Winnie the Pooh and Disney Princesses, CARS^™ from Pixar, and all Disney films and television properties for use in Mattel’s DVD board games, such as Scene It?^™, sold in North America), Viacom International, Inc. relating to its Nickelodeon properties (including Dora the Explorer^™, Go-Diego-Go!^™, and SpongeBob SquarePants^™), Origin Products Limited relating to Polly Pocket!^™, Warner Bros. Consumer Products (including Batman^™, Superman^™, and Justice League^™), Sesame Workshop (relating to its Sesame Street^® properties including Elmo).

Royalty expense during 2006, 2005 and 2004 was $261.2 million, $225.6 million and $204.5 million, respectively. See “Product Design and Development” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.”

Mattel also licenses a number of its trademarks, characters and other property rights to others for use in connection with the sale of non-toy products that do not compete with Mattel’s products. Mattel distributes some third-party finished products that are independently designed and manufactured.

Trademarks, Copyrights and Patents

Most of Mattel’s products are sold under trademarks, trade names and copyrights, and a number of those products incorporate patented devices or designs. Trade names and trademarks are significant assets of Mattel in that they provide product recognition and acceptance worldwide.

Mattel customarily seeks patent, trademark or copyright protection covering its products, and it owns or has applications pending for US and foreign patents covering many of its products. A number of these trademarks and copyrights relate to product lines that are significant to Mattel’s business and operations. Mattel believes its rights to these properties are adequately protected, but there can be no assurance that its rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged.

Commitments

In the normal course of business, Mattel enters into contractual arrangements for future purchases of goods and services to ensure availability and timely delivery, and to obtain and protect Mattel’s right to create and market certain products. Certain of these commitments routinely contain provisions for guaranteed or minimum expenditures during the term of the contracts. Current and future commitments for guaranteed payments reflect Mattel’s focus on expanding its product lines through alliances with businesses in other industries.

As of December 31, 2006, Mattel had outstanding commitments for purchases of inventory, other assets and services totaling $372.9 million in fiscal year 2007. Licensing and similar agreements with terms extending through 2011 contain provisions for future guaranteed minimum payments aggregating approximately $135.0 million. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.”

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Backlog

Mattel ships products in accordance with delivery schedules specified by its customers, which usually request delivery within three months. In the toy industry, orders are subject to cancellation or change at any time prior to shipment. In recent years, a trend toward just-in-time inventory practices in the toy industry has resulted in fewer advance orders and therefore less backlog of orders. Mattel believes that the amount of backlog orders at any given time may not accurately indicate future sales.

Financial Instruments

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes.

For additional information regarding foreign currency contracts, see “International Segment” above, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Item 8 “Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements.”

Seasonal Financing

Mattel maintains and periodically amends or replaces a $1.3 billion domestic unsecured committed revolving credit facility with a commercial bank group that is used as the primary source of financing for the seasonal working capital requirements of its domestic subsidiaries. The agreement in effect was amended and restated in March 2005 and the expiration date of the facility was extended to March 23, 2010. The other terms and conditions of the amended and restated facility are substantially similar to those contained in the previous facility. Interest is charged at various rates selected by Mattel, ranging from market commercial paper rates to the bank reference rate. The domestic unsecured committed revolving credit facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet these financial covenant ratios at the end of each fiscal quarter and fiscal year, using the formulae specified in the credit agreement to calculate the ratios. Mattel was in compliance with such covenants at the end of each fiscal quarter and fiscal year in 2006. As of December 31, 2006, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.29 to 1 (compared to a maximum allowed of 0.50 to 1) and Mattel’s interest coverage ratio was 11.72 to 1 (compared to a minimum allowed of 3.50 to 1).

On December 9, 2005, Mattel, Mattel Asia Pacific Sourcing Limited (“MAPS”), a wholly-owned subsidiary of Mattel, Bank of America, N.A., as a lender and administrative agent, and other financial institutions executed a credit agreement (“the MAPS facility”) which provides for (i) a term loan facility of $225.0 million consisting of a term loan advanced to MAPS in the original principal amount of $225.0 million, with $50.0 million of such amount to be repaid on each of December 15, 2006 and December 15, 2007, and the remaining aggregate principal amount of $125.0 million to be repaid on December 9, 2008, and (ii) a revolving loan facility consisting of revolving loans advanced to MAPS in the maximum aggregate principal amount at any time outstanding of $100.0 million, with a maturity date of December 9, 2008. Interest is charged at various rates selected by Mattel based on Eurodollar rates or bank reference rates. On December 15, 2006, in addition to the required payment of $50.0 million, MAPS prepaid an incremental $125.0 million of the MAPS term loan facility. The remaining $50.0 million principal amount, consisting of $14.3 million due on December 15, 2007 and $35.7 million due on December 9, 2008, was prepaid on January 16, 2007. As of December 31, 2006, there was no balance outstanding on the MAPS revolving loan facility. In connection with the MAPS facility, Mattel executed a

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Continuing Guaranty Agreement pursuant to which Mattel unconditionally guaranteed the obligations of MAPS arising pursuant to the MAPS facility. The MAPS facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios at the end of each fiscal quarter and fiscal year, using the formulae specified and ratios allowed in the MAPS facility to calculate the ratios. The formulae specified in the MAPS facility are the same as those required by the domestic unsecured committed revolving credit facility. Mattel was in compliance with such covenants at December 31, 2006.

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. As of December 31, 2006, foreign credit lines totaled approximately $200 million, a portion of which are used to support letters of credit. Mattel expects to extend the majority of these credit lines throughout 2007.

In June 2006, Mattel issued $100.0 million of unsecured floating rate senior notes (“Floating Rate Senior Notes”) due June 15, 2009 and $200.0 million of unsecured 6.125% senior notes (“6.125% Senior Notes”) due June 15, 2011 (collectively “Senior Notes”). Interest on the Floating Rate Senior Notes is based on the three-month US Dollar London Interbank Offered Rate (“LIBOR”) plus 40 basis points with interest payable quarterly beginning September 15, 2006. Interest on the 6.125% Senior Notes is payable semi-annually beginning December 15, 2006. The 6.125% Senior Notes may be redeemed at any time at the option of Mattel at a redemption price equal to the greater of (i) the principal amount of the notes being redeemed plus accrued interest to the redemption date, or (ii) a “make whole” amount based on the yield of a comparable US Treasury security plus 20 basis points.

In June 2006, Mattel entered into two interest rate swap agreements on the $100.0 million Floating Rate Senior Notes, each in a notional amount of $50.0 million, for the purpose of hedging the variability of cash flows in the interest payments due to fluctuations of the LIBOR benchmark interest rate. These cash flow hedges are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, whereby the hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in accumulated other comprehensive loss. Under the terms of the agreements, Mattel receives quarterly interest payments from the swap counterparties based on the three-month LIBOR plus 40 basis points and makes semi-annual interest payments to the swap counterparties based on a fixed rate of 5.87125%. The three-month LIBOR rate used to determine interest payments under the interest rate swap agreements resets every three months, matching the variable interest on the Floating Rate Senior Notes. The agreements expire in June 2009, which corresponds with the maturity of the Floating Rate Senior Notes.

In October 2005, a major credit rating agency maintained its long-term rating for Mattel at BBB, but changed its long-term outlook to negative and reduced its short-term rating to A-3. In March 2006, this same credit rating agency reduced Mattel’s long-term credit rating to BBB- and changed the outlook from negative to stable. Also in October 2005, another major credit rating agency maintained its long-term rating for Mattel at Baa2, but changed its long-term outlook to negative. In May 2006, another major credit rating agency reduced Mattel’s long-term credit rating to BBB. Management does not expect these actions to have a significant impact on Mattel’s ability to obtain financing or to have a significant negative impact on Mattel’s liquidity or results of operations.

Mattel believes its cash on hand at the beginning of 2007, amounts available under its domestic unsecured committed revolving credit facility, the MAPS facility, and its foreign credit lines will be adequate to meet its seasonal financing requirements in 2007. As of December 31, 2006, Mattel had available incremental borrowing resources totaling approximately $1.3 billion under its domestic unsecured committed revolving credit facility, the MAPS facility and foreign credit lines.

Mattel has a $300.0 million domestic receivables sales facility that is a sub-facility of Mattel’s domestic unsecured committed revolving credit facility. The outstanding amount of receivables sold under the domestic

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receivables facility may not exceed $300.0 million at any given time, and the amount available to be borrowed under the credit facility is reduced to the extent of any such outstanding receivables sold. Under the domestic receivables facility, certain trade receivables are sold to a group of banks, which currently include, among others, Bank of America, N.A., as administrative agent, Citicorp USA, Inc. and Barclays Bank PLC, as co-syndication agents, and Societe Generale and BNP Paribas, as co-documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell eligible trade receivables from Wal-Mart and Target to Mattel Factoring, Inc. (“Mattel Factoring”), a Delaware corporation and wholly-owned, consolidated subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. Pursuant to the terms of the domestic receivables facility and simultaneous with each receivables purchase, Mattel Factoring sells those receivables to the bank group. Mattel records the transaction, reflecting cash proceeds and sale of accounts receivable in its consolidated balance sheet, at the time of the sale of the receivables to the bank group.

Sales of receivables pursuant to the domestic receivables sale facility occur periodically, generally quarterly. The receivables are sold by Mattel Sales Corp. and Fisher-Price, Inc. to Mattel Factoring for a purchase price equal to the nominal amount of the receivables sold. Mattel Factoring then sells such receivables to the bank group at a slight discount, and Mattel acts as a servicer for such receivables. Mattel has designated Mattel Sales Corp. and Fisher-Price, Inc. as sub-servicers, as permitted by the facility. Mattel’s appointment as a servicer is subject to termination events that are customary for such transactions. The domestic receivables sales facility is also subject to conditions to funding, representations and warranties, undertakings and early termination events that are customary for transactions of this nature. Mattel retains a servicing interest in the receivables sold under this facility.

Until the Master Agreement was terminated on February 9, 2007, Mattel International Holdings B.V., a company incorporated in the Netherlands (the “Depositor”), Mattel France, a company incorporated in France (“Mattel France”), and Mattel GmbH, a company incorporated in Germany (“Mattel Germany”), each of which is a subsidiary of Mattel, and Societe Generale Bank Nederland N.V. (“SGBN”), were parties to a Master Agreement for the Transfer of Receivables that established a Euro 150 million European trade receivables facility (the “European trade receivables facility”), pursuant to which Mattel France and Mattel Germany sold trade receivables to SGBN. The European trade receivables facility was subject to conditions to funding, representations and warranties, undertakings and early termination events that were customary for transactions of this nature.

Sales of receivables pursuant to the European trade receivables facility occurred monthly, with the last such sale occurring on January 10, 2007. The receivables were sold by Mattel France and Mattel Germany directly to SGBN for a purchase price equal to the nominal amount of the receivables sold. As a result, no Mattel subsidiary was used as a special purpose entity in connection with these transactions. A portion of the purchase price was funded by SGBN and a portion by a deposit provided by the Depositor. The amount of the deposit was reset on each date on which new receivables were sold. During the 12-month period ending December 31, 2006, the deposit was, on average, equal to about 51% of the aggregate notional amount of sold receivables outstanding during such period.

As with the domestic receivables facility, each sale of accounts receivable was recorded in Mattel’s consolidated balance sheet at the time of such sale. Under the European trade receivables facility, the outstanding amount of receivables sold could not exceed Euro 60 million from February 1 through July 31 of each year and could not exceed Euro 150 million at all other times.

Each of Mattel France and Mattel Germany was appointed to service the receivables sold by it to SGBN. No servicing fees were paid by SGBN for such services. The appointment of each of Mattel France and Mattel Germany to act as servicer was subject to termination events that were customary for transactions of this nature.

Mattel France and Mattel Germany were obligated to pay certain fees to the Depositor in consideration of the Depositor providing the deposit to SGBN. During the 12-month period ending December 31, 2006, fees paid

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by Mattel France and Mattel Germany to the Depositor were, on average, approximately 0.11% of the aggregate notional amount of sold receivables outstanding during such period.

In November 2006, the commitment termination date for the European trade receivables facility was extended until February 28, 2007. However, effective on February 9, 2007, the Depositor, Mattel France and Mattel Germany terminated the European trade receivable facility with SGBN. The Company determined the facility was no longer necessary based on projected international cash flows and seasonal financing needs.

Government Regulations and Environmental Quality

Mattel’s toy products sold in the US are subject to the provisions of the Consumer Product Safety Act and the Federal Hazardous Substances Act, and may also be subject to the requirements of the Flammable Fabrics Act or the Food, Drug and Cosmetics Act, and the regulations promulgated pursuant to such statutes. The Consumer Product Safety Act and the Federal Hazardous Substances Act enable the Consumer Product Safety Commission (“CPSC”) to exclude from the market consumer products that fail to comply with applicable product safety regulations or otherwise create a substantial risk of injury, as well as articles that contain excessive amounts of a banned hazardous substance. The CPSC may also require the recall and repurchase or repair of articles that are banned. Similar laws exist in some states and cities and in many international markets.

Mattel maintains a quality control program to ensure compliance with various US federal, state and applicable foreign product safety requirements. Notwithstanding the foregoing, there can be no assurance that all of Mattel’s products are or will be free from defects or are hazard-free. A product recall could have a material adverse effect on Mattel’s results of operations and financial condition, depending on the product affected by the recall and the extent of the recall efforts required. A product recall could also negatively affect Mattel’s reputation and the sales of other Mattel products. See Item 1A “Risk Factors—Factors That May Affect Future Results.”

Mattel’s advertising is subject to the Federal Trade Commission Act, The Children’s Television Act of 1990, the rules and regulations promulgated by the Federal Trade Commission and the Federal Communications Commission as well as laws of certain countries that regulate advertising and advertising to children. In addition, Mattel’s websites that are directed towards children are subject to The Children’s Online Privacy Protection Act of 1998. Mattel is subject to various other federal, state and local laws and regulations applicable to its business. Mattel believes that it is in substantial compliance with these laws and regulations.

Mattel’s operations are from time to time the subject of investigations, conferences, discussions and negotiations with various federal, state and local environmental agencies with respect to the discharge or cleanup of hazardous waste and compliance by those operations with environmental laws and regulations. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements—Environmental.”

Employees

The total number of persons employed by Mattel and its subsidiaries at any one time varies because of the seasonal nature of its manufacturing operations. At December 31, 2006, Mattel’s total number of employees was approximately 32,000.

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Executive Officers of the Registrant

The current executive officers of Mattel, all of whom are appointed annually by and serve at the pleasure of the Board of Directors, are as follows:

Name	Age	Position	Executive Officer Since
Robert A. Eckert	52	Chairman of the Board and Chief Executive Officer	2000
Ellen L. Brothers	51	Executive Vice President of Mattel and President, American Girl	2003
Thomas A. Debrowski	56	Executive Vice President, Worldwide Operations	2000
Kevin M. Farr	49	Chief Financial Officer	1996
Neil B. Friedman	59	President, Mattel Brands	1999
Alan Kaye	53	Senior Vice President, Human Resources	2000
Robert Normile	47	Senior Vice President, General Counsel and Secretary	1999
Michael A. Salop	42	Senior Vice President, External Affairs and Treasurer	2005
Bryan Stockton	53	Executive Vice President, International	2000
H. Scott Topham	46	Senior Vice President and Corporate Controller	2004

Mr. Eckert has been Chairman of the Board and Chief Executive Officer since May 2000. He was formerly President and Chief Executive Officer of Kraft Foods, Inc., the largest packaged food company in North America, from October 1997 until May 2000. From 1995 to 1997, Mr. Eckert was Group Vice President of Kraft Foods, Inc. From 1993 to 1995, Mr. Eckert was President of the Oscar Mayer foods division of Kraft Foods, Inc. Mr. Eckert worked for Kraft Foods, Inc. for 23 years prior to joining Mattel.

Ms. Brothers has been Executive Vice President of Mattel and President, American Girl since July 2000. From November 1998 to July 2000, she was Senior Vice President of Operations, Pleasant Company (which merged with and into Mattel on December 31, 2003, followed immediately on January 1, 2004, by an asset transfer to Mattel’s subsidiary American Girl). From January 1997 to November 1998, she was Vice President of the Catalogue Division, Pleasant Company. She joined Pleasant Company in 1995, prior to its acquisition by Mattel in July 1998, as Vice President of Catalogue Marketing.

Mr. Debrowski has been Executive Vice President, Worldwide Operations, since November 2000. From February 1992 until November 2000, he was Senior Vice President-Operations and a director of The Pillsbury Company. From September 1991 until February 1992, he was Vice President of Operations for the Baked Goods Division of The Pillsbury Company. Prior to that, he served as Vice President and Director of Grocery Operations for Kraft U.S.A.

Mr. Farr has been Chief Financial Officer since February 2000. From September 1996 to February 2000, he was Senior Vice President and Corporate Controller. From June 1993 to September 1996, he served as Vice President, Tax. Prior to that, he served as Senior Director, Tax from August 1992 to June 1993.

Mr. Friedman has been President, Mattel Brands (which includes Mattel Girls & Boys Brands US and Fisher-Price Brands US) since October 2005. From March 1999 to October 2005, he was President, Fisher-Price Brands. From August 1995 to March 1999, he was President, Tyco Preschool. For more than five years prior to that time, he was President of MCA/Universal Merchandising, Senior Vice President-Sales, Marketing and

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Design of Just Toys, Vice President and General Manager of Baby Care for Gerber Products, Executive Vice President and Chief Operating Officer of Lionel Leisure, Inc., and President of Aviva/Hasbro.

Mr. Kaye has been Senior Vice President, Human Resources since July 1997. From June 1996 to June 1997 he was President, Texas Division of Kaufman and Broad Homes, a home building company. From June 1991 to June 1996, he served as Senior Vice President, Human Resources for Kaufman and Broad Homes. Prior to that, he worked for two years with the Hay Group, a compensation consulting firm and for 12 years with IBM in various human resources positions.

Mr. Normile has been Senior Vice President, General Counsel and Secretary since March 1999. He served as Vice President, Associate General Counsel and Secretary from August 1994 to March 1999. From June 1992 to August 1994, he served as Assistant General Counsel. Prior to that, he was associated with the law firms of Latham & Watkins LLP and Sullivan & Cromwell LLP.

Mr. Salop has been Senior Vice President, External Affairs and Treasurer since September 2005. He served as Senior Vice President, Strategic Opportunities from May 2004 through September 2005 and Senior Vice President, Corporate Strategic Planning from February 2003 through May 2004. From July 2000 to February 2003 he was Senior Vice President, Finance Europe and from August 1998 through July 2000 he was Vice President, Finance American Girl. Prior to that, he served in various financial roles after joining Mattel in 1990.

Mr. Stockton has been Executive Vice President, International since February 2003. He served as Executive Vice President, Business Planning and Development from November 2000 until February 2003. From April 1998 until November 2000, he was President and Chief Executive Officer of Basic Vegetable Products, the largest manufacturer of vegetable ingredients in the world. For more than 20 years prior to that, he was employed by Kraft Foods, Inc., the largest packaged food company in North America, and was President of Kraft North American Food Service from August 1996 to March 1998.

Mr. Topham has been Senior Vice President and Corporate Controller since September 2005. He served as Senior Vice President and Treasurer from March 2005 to August 2005 and as Vice President and Treasurer from March 2004 to March 2005. Prior to that, he served as Vice President and Assistant Controller from May 2001 to March 2004. From August 2000 to May 2001, he served as Vice President and Treasurer of Premier Practice Management, Inc. From June 1999 to August 2000, he served as Division Vice President of Dataworks, Inc., a specialized publishing company. Prior to that, he spent eight years with Total Petroleum (North America) Ltd., most recently as Vice President of Human Resources.

Available Information

Mattel files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) with the SEC. The public may read and copy any materials that Mattel files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

Mattel’s Internet website address is http://www.mattel.com. Mattel makes available on its Internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.

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Item 1A.    Risk Factors.

Factors That May Affect Future Results

(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

Certain written and oral statements made or incorporated by reference from time to time by Mattel or its representatives in this Annual Report on Form 10-K, other filings or reports filed with the SEC, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about: sales and inventory levels; brand and customer management programs; increased competition; initiatives to promote revenue growth; globalization initiatives; restructuring and financial realignment plans; special charges and other non-recurring charges; initiatives aimed at anticipated cost savings; initiatives to invigorate the Barbie^® brand, enhance innovation, improve the execution of the core business, leverage scale, extend brands, catch new trends, create new brands and enter new categories, develop people, improve productivity, simplify processes, maintain customer service levels and improve supply chain; integration of Radica Games Limited; operating efficiencies; capital and investment framework (including statements about free cash flow, seasonal working capital, debt-to-total capital ratios, capital expenditures, strategic acquisitions, dividends and share repurchases); cost pressures and increases; advertising and promotion spending; profitability; price increases, retail store openings and the impact of recent organizational changes. Mattel is including this Cautionary Statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-looking statements. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results, performance, or achievements. Forward-looking statements can be identified by the use of terminology such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “project,” “continue,” “plans,” “aims,” “intends,” “likely,” or other similar words or phrases. Except for historical matters, the matters discussed in this Annual Report on Form 10-K and other statements or filings made by Mattel from time-to-time may be forward-looking statements. Management cautions you that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. In addition to the important factors detailed herein and from time-to-time in other reports filed by Mattel with the SEC, including Forms 8-K, 10-Q and 10-K, the following important factors could cause actual results to differ materially from past results or those suggested by any forward-looking statements.

If Mattel does not successfully satisfy consumer preferences, enhance existing products, develop and introduce new products and achieve consumer acceptance of those products, Mattel’s results of operations may be adversely affected.

Mattel’s business and operating results depend largely upon the appeal of its toy products. Consumer preferences, particularly among end users of Mattel’s products–children–are continuously changing. Significant, sudden shifts in demand are caused by “hit” toys and trends, which are often unpredictable. Mattel offers a diverse range of products for children of all ages and families that includes, among others, toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, hand-held and other games, puzzles, educational toys, media-driven products and fashion-related toys. Mattel competes domestically and internationally with a wide range of large and small manufacturers, marketers and sellers of toys, video games, consumer electronics and other play products, as well as retailers, which means that Mattel’s market position is always at risk. Mattel’s ability to maintain its current product sales, and increase its product sales or establish product sales with new, innovative toys, will depend on Mattel’s ability to satisfy play preferences, enhance existing products, develop and introduce new products, and achieve market acceptance of these products. Competition is intensifying due to recent trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing toys at younger ages and an increasing use of more sophisticated technology in toys. If Mattel does not successfully meet the challenges outlined above in a timely and cost-effective manner, demand for its products could decrease and Mattel’s revenues, profitability and results of operations may be adversely affected.

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Mattel’s business is susceptible to changes in popular culture, media, fashion, and technology. Misperceptions of trends in popular culture, media and movies, fashion, or technology can negatively affect Mattel’s sales.

Successful movies and characters in children’s literature affect play preferences, and many toys depend on media-based intellectual property licenses. Media-based licenses can cause a line of toys to gain immediate success among children, parents, or families. Trends in media, movies, and children’s characters change swiftly and contribute to the transience and uncertainty of play preferences. Mattel responds to such trends and developments by modifying, refreshing, extending, and expanding its product offerings on an annual basis. If Mattel does not accurately anticipate trends in popular culture, movies, media, fashion, or technology, its products may not be accepted by children, parents, or families and could negatively affect Mattel’s sales.

Mattel’s business is seasonal and therefore its operating results will depend, in large part, on sales during the relatively brief traditional holiday season. Improved inventory management by retailers resulting in shorter lead times for production and possible shipping disruptions during peak demand times may affect Mattel’s ability to deliver its products in time to meet retailer demands.

Mattel’s business is subject to risks associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Sales of toy products at retail are seasonal, with a majority of retail sales occurring during the period from September through December. As a result, Mattel’s operating results will depend, in large part, on sales during the relatively brief traditional holiday season. Retailers are attempting to manage their inventories better, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. This in turn results in shorter lead times for production. Management believes that the increase in “last minute” shopping during the holiday season and the popularity of gift cards (which often result in purchases after the holiday season) may negatively impact customer re-orders during the holiday season. Shipping disruptions limiting the availability of ships or containers in Asia during peak demand times may affect Mattel’s ability to deliver its products in time to meet retailer demand. These factors may decrease sales or increase the risk that Mattel may not be able to meet demand for certain products at peak demand times, or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed.

Uncertainty and adverse changes in the general economic conditions of markets in which Mattel participates may negatively affect Mattel’s business.

Current and future conditions in the economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts, sectors and regions of the economy, including the many different markets in which Mattel participates. Because all components of Mattel’s budgeting and forecasting are dependent upon estimates of growth or contraction in the markets it serves and demand for its products, the prevailing economic uncertainties render estimates of future income and expenditures very difficult to make. Adverse changes may occur as a result of soft global or regional economic conditions, rising oil prices, wavering consumer confidence, unemployment, declines in stock markets or other factors affecting economic conditions generally. These changes may negatively affect the sales of Mattel’s products, increase exposure to losses from bad debts, or increase costs associated with manufacturing and distributing products.

The concentration of Mattel’s business with a small retail customer base that makes no binding long-term commitments means that economic difficulties or changes in the purchasing policies of its major customers could have a significant impact on Mattel’s business and operating results.

A small number of customers account for a large share of Mattel’s net sales. In 2006, Mattel’s three largest customers, Wal-Mart, Toys “R” Us and Target, in the aggregate, accounted for approximately 43% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 52% of net sales. The concentration

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of Mattel’s business with a relatively small number of customers may expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to significantly reduce purchases for any reason, favor competitors or new entrants, or increase their direct competition with Mattel by expanding their private-label business. Customers make no binding long-term commitments to Mattel regarding purchase volumes and make all purchases by delivering one-time purchase orders. Any customer could reduce its overall purchases of Mattel’s products, reduce the number and variety of Mattel’s products that it carries and the shelf space allotted for Mattel’s products, or otherwise seek to materially change the terms of the business relationship at any time. Any such change could significantly harm Mattel’s business and operating results.

The production and sale of private-label toys by Mattel’s retail customers may result in lower purchases of Mattel-branded products by those retail customers.

In recent years, consumer goods companies generally, including those in the toy business, have experienced the phenomenon of retail customers developing their own private-label products that directly compete with the products of traditional manufacturers. Some retail chains that are customers of Mattel sell private-label toys designed, manufactured and branded by the retailers themselves. These toys may be sold at prices lower than comparable toys sold by Mattel, and may result in lower purchases of Mattel-branded products by these retailers. In some cases, retailers who sell these private-label toys are larger than Mattel and may have substantially more resources than Mattel.

Liquidity problems or bankruptcy of Mattel’s key customers could increase Mattel’s exposure to losses from bad debts and could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Many of Mattel’s key customers are mass-market retailers. The mass-market retail channel in the US has experienced significant shifts in market share among competitors in recent years, causing some large retailers to experience liquidity problems. From 2001 through early 2004, four large customers of Mattel filed for bankruptcy. In addition, Mattel’s sales to customers are typically made on credit without collateral. There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy or other factors beyond the control of Mattel, which could increase Mattel’s exposure to losses from bad debts. In addition, if these or other customers were to cease doing business as a result of bankruptcy, or significantly reduce the number of stores operated, it could have a material adverse effect on Mattel’s business, financial condition and results of operations.

A reduction or interruption in the delivery of raw materials, parts and components from its suppliers or a significant increase in the price of supplies could negatively impact the gross profit margins realized by Mattel on the sale of its products or result in lower sales.

Mattel’s ability to meet customer demand depends, in part, on its ability to obtain timely and adequate delivery of materials, parts and components from its suppliers and internal manufacturing capacity. Mattel has experienced shortages in the past, including raw materials and components. Although Mattel works closely with suppliers to avoid these types of shortages, there can be no assurance that Mattel will not encounter these problems in the future. A reduction or interruption in supplies or a significant increase in the price of one or more supplies, such as fuel and resin (which is an oil-based product) expenses, could have a material adverse effect on Mattel’s business. Cost increases, whether resulting from shortages of materials or otherwise, including but not limited to rising costs of materials, transportation, services and labor (including but not limited to wages, expenses related to employee health plans and insurance), could impact the profit margins realized by Mattel on the sale of its products. Because of market conditions, timing of pricing decisions and other factors, there can be no assurance that Mattel will be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of Mattel’s products could result in lower sales.

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Unfavorable resolution of pending and future litigation matters and disputes could have a material adverse effect on Mattel’s financial condition.

Mattel is involved in a number of litigation matters. An unfavorable resolution of pending litigation could have a material adverse effect on Mattel’s financial condition. Litigation may result in substantial costs and expenses and significantly divert the attention of Mattel’s management regardless of the outcome. There can be no assurance that Mattel will be able to achieve a favorable settlement of pending litigation or obtain a favorable resolution of litigation if it is not settled. In addition, current and future litigation, governmental proceedings, labor disputes or environmental matters could lead to increased costs or interruptions of the normal business operations of Mattel.

Recalls, post-manufacture repairs of Mattel products, product liability claims, absence or cost of insurance, and associated administrative costs could harm Mattel’s reputation, increase costs or reduce sales.

Mattel is subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and its products could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety may lead Mattel to voluntarily recall selected products. Mattel has experienced, and in the future may experience, defects or errors in products after their production and sale to customers. These defects or errors could result in the rejection of Mattel’s products by customers, damage to its reputation, lost sales, diverted development resources and increased customer service and support costs, any of which could harm Mattel’s business. Individuals could sustain injuries from Mattel’s products, and Mattel may be subject to claims or lawsuits resulting from these injuries. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, Mattel’s insurance coverage. Moreover, Mattel may be unable to obtain adequate liability insurance in the future. Recalls, post-manufacture repairs of Mattel products, absence or cost of insurance, and administrative costs associated with recalls could harm Mattel’s reputation, increase costs or reduce sales.

Failure by Mattel to protect its proprietary intellectual property and information could have a material adverse effect on Mattel’s business, financial condition and results of operations.

The value of Mattel’s business depends to a large degree on its ability to protect its intellectual property and information, including its trademarks, trade names, copyrights, patents and trade secrets in the US and around the world, as well as its customer, employee and consumer data. Any failure by Mattel to protect its proprietary intellectual property and information, including any successful challenge to Mattel’s ownership of its intellectual property or material infringements of its intellectual property, could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Political developments, including trade relations, and the threat or occurrence of war or terrorist activities could materially impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.

Mattel’s business is worldwide in scope, including operations in 42 countries. The deterioration of the political situation in a country in which Mattel has significant sales or operations, or the breakdown of trade relations between the US and a foreign country in which Mattel has significant manufacturing facilities or other operations, could adversely affect Mattel’s business, financial condition and results of operations. For example, a change in trade status for China could result in a substantial increase in the import duty of toys manufactured in China and imported into the US. In addition, the occurrence of war or hostilities between countries or threat of terrorist activities, and the responses to and results of these activities, could materially impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.

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Disruptions in Mattel’s manufacturing operations due to political instability, civil unrest, SARS, avian flu or other diseases could negatively impact Mattel’s business, financial position and results of operations.

Mattel owns and operates manufacturing facilities and utilizes third-party manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and Thailand. The risk of political instability and civil unrest exists in certain of these countries, which could temporarily or permanently damage Mattel’s manufacturing operations located there. In the past, outbreaks of SARS have been significantly concentrated in Asia, particularly in Hong Kong, and in the Guangdong province of China, where many of Mattel’s manufacturing facilities and third-party manufacturers are located. The design, development and manufacture of Mattel’s products could suffer if a significant number of Mattel’s employees or the employees of its third-party manufacturers or their suppliers contract SARS, avian flu or other communicable diseases, or otherwise are unable to fulfill their responsibilities. Mattel has developed contingency plans designed to help mitigate the impact of disruptions in its manufacturing operations. Mattel’s business, financial position and results of operations could be negatively impacted by a significant disruption to its manufacturing operations or suppliers.

Earthquakes or other catastrophic events out of our control may damage Mattel’s facilities or those of its contractors and harm Mattel’s results of operations.

Mattel has significant operations, including its corporate headquarters, near major earthquake faults in Southern California. Southern California has experienced earthquakes, wildfires and other natural disasters in recent years. A catastrophic event where Mattel has important operations, such as an earthquake, tsunami, flood, typhoon, fire or other natural or manmade disaster, could disrupt Mattel’s operations or those of its contractors and impair production or distribution of its products, damage inventory, interrupt critical functions or otherwise affect business negatively, harming Mattel’s results of operations.

Significant changes in currency exchange rates could have a material adverse effect on Mattel’s business and results of operations.

Mattel’s net investment in its foreign subsidiaries and its results of operations and cash flows are subject to changes in currency exchange rates and regulations. Mattel seeks to mitigate the exposure of its results of operations to fluctuations in currency exchange rates by partially hedging this exposure using foreign currency forward exchange and option contracts. These contracts are primarily used to hedge Mattel’s purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. Government action may restrict Mattel’s ability to transfer capital across borders and may also impact the fluctuation of currencies in the countries where Mattel conducts business or has invested capital. Significant changes in currency exchange rates, reductions in Mattel’s ability to transfer its capital across borders, and changes in government-fixed currency exchange rates, including the Chinese yuan, could have a material adverse effect on Mattel’s business and results of operations.

Increases in interest rates, reduction of Mattel’s credit ratings or the inability of Mattel to meet the debt covenant coverage requirements in its credit facilities could negatively impact Mattel’s ability to conduct its operations.

Increases in interest rates, both domestically and internationally, could negatively affect Mattel’s cost of financing both its operations and investments. Any reduction in Mattel’s credit ratings could increase the cost of obtaining financing. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as an inability to meet its debt covenant requirements, which include maintaining consolidated debt-to-capital and interest coverage ratios. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.

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Mattel’s failure to successfully market or advertise its products could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Mattel’s products are marketed worldwide through a diverse spectrum of advertising and promotional programs. Mattel’s ability to sell products is dependent in part upon the success of these programs. If Mattel does not successfully market its products or if media or other advertising or promotional costs increase, these factors could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Failure to successfully implement new initiatives could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Mattel has announced initiatives to improve the execution of its core business, globalize and extend Mattel’s brands, catch new trends, create new brands and offer new innovative toys, develop people, improve productivity, simplify processes, maintain customer service levels, as well as new initiatives designed to drive sales growth, manage costs and improve its supply chain. These initiatives involve investment of capital and complex decision making as well as extensive and intensive execution, and the success of these initiatives is not assured. Failure to successfully implement any of these initiatives could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Mattel depends on key personnel and may not be able to hire, retain and integrate sufficient qualified personnel to maintain and expand its business.

Mattel’s future success depends partly on the continued contribution of key executives, designers, technical, sales, marketing, manufacturing and administrative personnel. The loss of services of any of Mattel’s key personnel could harm Mattel’s business. Recruiting and retaining skilled personnel is costly and highly competitive. If Mattel fails to retain, hire, train and integrate qualified employees and contractors, Mattel will not be able to maintain and expand Mattel’s business.

Mattel is subject to various laws and government regulations, violation of which could subject it to sanctions. In addition, changes in such laws or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations that would negatively impact Mattel’s financial condition and results of operations.

Mattel operates in a highly regulated environment in the US and international markets. US federal, state and local governmental entities and foreign governments regulate many aspects of Mattel’s business, including its products and the importation and exportation of its products. These regulations may include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws and revised tax law interpretations), trade restrictions, regulations regarding financial matters, environmental regulations, advertising directed toward children, safety and other administrative and regulatory restrictions. While Mattel takes all the steps it believes are necessary to comply with these laws and regulations, there can be no assurance that Mattel will be in compliance in the future. Failure to comply could result in monetary liabilities and other sanctions which could have a negative impact on Mattel’s business, financial condition and results of operations. In addition, changes in laws or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations that would negatively impact its financial condition and results of operations.

Mattel may engage in acquisitions, mergers or dispositions, which may affect the profit, revenues, profit margins, debt-to-capital ratio, capital expenditures or other aspects of Mattel’s business. In addition, Mattel has certain anti-takeover provisions in its by-laws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.

Mattel may engage in acquisitions, mergers or dispositions, which may affect the profit, revenues, profit margins, debt-to-capital ratio, capital expenditures, or other aspects of Mattel’s business. There can be no

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assurance that Mattel will be able to identify suitable acquisition targets or merger partners or that, if identified, it will be able to acquire these targets on acceptable terms or agree to terms with merger partners. There can also be no assurance that Mattel will be successful in integrating any acquired company into its overall operations, or that any such acquired company will operate profitably or will not otherwise adversely impact Mattel’s results of operations. Further, Mattel cannot be certain that key talented individuals at these acquired companies will continue to work for Mattel after the acquisition or that they will continue to develop popular and profitable products or services. In addition, Mattel has certain anti-takeover provisions in its bylaws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.

If any of the risks and uncertainties described in the cautionary factors listed above actually occurs, Mattel’s business, financial condition and results of operations could be materially and adversely affected. The factors listed above are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact Mattel’s business, financial condition and results of operations. Moreover, Mattel operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all of these factors on Mattel’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by Mattel or its representatives may turn out to be wrong. Mattel expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

Mattel owns its corporate headquarters in El Segundo, California, consisting of approximately 335,000 square feet, and an adjacent office building consisting of approximately 55,000 square feet. Mattel also leases buildings in El Segundo consisting of approximately 327,000 square feet. All segments use these facilities. Mattel’s Fisher-Price subsidiary owns its headquarters facilities in East Aurora, New York, consisting of approximately 535,000 square feet, which is used by the Fisher-Price Brands US segment and for corporate support functions. American Girl Brands owns its headquarters facilities in Middleton, Wisconsin, consisting of approximately 180,000 square feet, a warehouse in Middleton, consisting of approximately 215,000 square feet, and distribution facilities in Middleton, DeForest and Wilmot, Wisconsin, consisting of a total of approximately 948,000 square feet, all of which are used by the American Girl Brands segment.

Mattel maintains leased sales offices in California, Illinois, Minnesota, New York, and Arkansas and leased warehouse and distribution facilities in California, New Jersey and Texas, all of which are used by the Domestic segment. Mattel has leased retail and related office space in Chicago, Illinois, New York, New York and Los Angeles, California for its American Girl Place^® stores, leased retail space in Oshkosh, Wisconsin, which are used by the American Girl Brands segment, and Pomona, California which is used by Mattel Brands. Mattel also has leased office space in Florida, which is used by the International segment, and California, Massachusetts, and Texas, which are used by Radica Games Limited (“Radica”). Mattel leases a computer facility in Phoenix, Arizona used by all segments. Internationally, Mattel has offices and/or warehouse space in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Colombia, Costa Rica, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Italy, Japan, Korea, Macau, Mexico, The Netherlands, New Zealand, Norway, Peru, Poland, Portugal, Puerto Rico, Romania, Singapore, South Korea, Spain, Switzerland, Taiwan, Turkey, the United Kingdom and Venezuela which are leased (with the exception of office space in Chile, certain warehouse space in France, and office and warehouse space in Hong Kong, that is

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owned by Mattel) and used by the International segment. Mattel’s principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia and Mexico. See “Manufacturing and Materials.”

For leases that are scheduled to expire during the next twelve months, Mattel may negotiate new lease agreements, renew existing lease agreements or utilize alternate facilities. See Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.” Mattel believes that its owned and leased facilities, in general, are suitable and adequate for its present and currently foreseeable needs.

Item 3.    Legal Proceedings.

See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Litigation” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.”

Item 4.    Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

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PART II

Item 5.    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

For information regarding the markets in which Mattel’s common stock, par value $1.00 per share, is traded, see the cover page hereof. For information regarding the high and low closing prices of Mattel’s common stock for the last two calendar years, see Item 8 “Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements.”

Holders of Record

As of February 23, 2007, Mattel had approximately 40,000 holders of record of its common stock.

Dividends

In 2006, 2005 and 2004, Mattel paid a dividend per share of $0.65, $0.50 and $0.45, respectively, to holders of its common stock. The board of directors declared the dividend in November, and Mattel paid the dividend in December of each year. The payment of dividends on common stock is at the discretion of Mattel’s Board of Directors and is subject to customary limitations.

Securities Authorized for Issuance under Equity Compensation Plans

The information regarding Mattel’s equity compensation plans is incorporated herein by reference to Mattel’s 2007 Notice of Annual Meeting of Stockholders and Proxy Statement.

Recent Sales of Unregistered Securities

During the fourth quarter of 2006, Mattel did not sell any unregistered securities.

Issuer Purchases of Equity Securities

The Board of Directors approved an increase to the share repurchase program of an additional $250.0 million in November 2003 and, at that time, there were share repurchase authorizations that had not been executed totaling $5.6 million. During 2004, Mattel repurchased 14.7 million shares at a cost of $255.1 million. In 2005, the Board of Directors approved the repurchase of an additional $500.0 million of Mattel’s common stock. During 2005, Mattel repurchased 28.9 million shares at a cost of $500.4 million. In January 2006, the Board of Directors authorized Mattel to increase its share repurchase program by an additional $250.0 million. During 2006, Mattel repurchased 11.8 million shares at a cost of $192.7 million. At December 31, 2006, share repurchase authorizations of $57.3 million had not been executed. Repurchases take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date.

During the fourth quarter of 2006, Mattel did not repurchase any shares of its common stock in the open market.

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Item 6.    Selected Financial Data.

	For the Year Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share and percentage information)
Operating Results:
Net sales (a)	$	5,650,156		$	5,179,016		$	5,102,786		$	4,960,100		$	4,885,340
Gross profit		2,611,793			2,372,868			2,410,725			2,429,483			2,360,987
% of net sales		46.2	%		45.8	%		47.2	%		49.0	%		48.3	%
Operating income		728,818			664,529			730,817			785,710			733,541
% of net sales		12.9	%		12.8	%		14.3	%		15.8	%		15.0	%
Income before income taxes		683,756			652,049			696,254			740,854			621,497
Provision for income taxes (b)		90,829			235,030			123,531			203,222			166,455
Income from continuing operations		592,927			417,019			572,723			537,632			455,042
Gain from discontinued operations, net of tax (c)		—			—			—			—			27,253
Cumulative effect of change in accounting principle, net of tax (d)		—			—			—			—			(252,194	)
Net income	$	592,927		$	417,019		$	572,723		$	537,632		$	230,101
Net Income Per Common Share—Basic:
Income from continuing operations	$	1.55		$	1.02		$	1.37		$	1.23		$	1.04
Gain from discontinued operations (c)		—			—			—			—			0.06
Cumulative effect of change in accounting principle (d)		—			—			—			—			(0.58	)
Net income per common share—basic		1.55			1.02			1.37			1.23			0.52
Net Income Per Common Share—Diluted:
Income from continuing operations		1.53			1.01			1.35			1.22			1.03
Gain from discontinued operations (c)		—			—			—			—			0.06
Cumulative effect of change in accounting principle (d)		—			—			—			—			(0.57	)
Net income per common share—diluted		1.53			1.01			1.35			1.22			0.52
Dividends Declared Per Common Share	$	0.65		$	0.50		$	0.45		$	0.40		$	0.05
	December 31,
	2006			2005			2004			2003			2002
	(In thousands)
Financial Position:
Total assets	$	4,955,884		$	4,372,313		$	4,756,492		$	4,510,950		$	4,459,659
Noncurrent liabilities		940,390			807,395			643,509			826,983			832,194
Stockholders’ equity		2,432,974			2,101,733			2,385,812			2,216,221			1,978,712

(a) Effective October 1, 2003, close out sales previously classified as a reduction of cost of sales are now classified as net sales in Mattel’s consolidated statements of operations. Close out sales for the fourth quarter of 2003, totaling $19.2 million, were included in reported net sales. This change in classification had no impact on gross profit, operating income, net income, net income per common share, balance sheets or cash flows.

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The following table provides the quantification of total close out sales by year (in thousands):

For the Year Ended
2003	2002
$57,328	$112,673

(b) The provision for income taxes in 2006 was positively impacted by the Tax Increase Prevention and Reconciliation Act (the “Tax Act”) passed in May 2006, and income tax benefits of $63.0 million related to tax settlements of ongoing audits with foreign tax authorities and a settlement with a state tax authority for tax years 1997 and 1998. The provision for income taxes in 2005 was negatively impacted by incremental tax expense of $107.0 million, resulting from Mattel’s decision to repatriate $2.4 billion in previously unremitted foreign earnings under the American Jobs Creation Act (the “Jobs Act”), partially offset by $38.6 million of tax benefit primarily relating to audit settlements with certain tax authorities in both the US and abroad. The provision for income taxes in 2004 was positively impacted by a $65.1 million tax benefit related to an audit settlement with the US Internal Revenue Service (“IRS”).

(c) The Consumer Software segment, which was comprised primarily of The Learning Company, Inc. (“Learning Company”), was reported as a discontinued operation effective March 31, 2000, and the consolidated financial statements were reclassified to segregate the operating results of the Consumer Software segment. In 2002, Gores Technology Group completed the sale and liquidation of non-cash proceeds related to the sales of the education and productivity divisions of the former Learning Company, Mattel received $43.3 million in cash proceeds from Gores Technology Group and recognized a gain on the disposal of discontinued operations of $27.3 million, net of taxes of $16.0 million, in the consolidated statement of operations in 2002.

(d) The cumulative effect of change in accounting principle, net of tax, in 2002, relates to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, and an impairment of goodwill upon adoption.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial statements and the related notes. See Item 8 “Financial Statements and Supplementary Data.”

Overview

Mattel designs, manufactures and markets a broad variety of toy products worldwide through sales to its customers and directly to consumers. Mattel’s business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines, to design and develop innovative new products and product lines, and to successfully market those products and product lines. Mattel plans to continue to focus on its portfolio of traditional brands that have historically had worldwide appeal, to create new brands utilizing its knowledge of children’s play patterns and to target customer and consumer preferences around the world.

Mattel’s portfolio of brands and products are grouped in the following categories:

Mattel Girls & Boys Brands—including Barbie^® fashion dolls and accessories (“Barbie^®”), Polly Pocket!^™, Pixel Chix^™,Winx Club^™ and Disney Classics (collectively “Other Girls Brands”), Hot Wheels^®, Matchbox^® and Tyco^® R/C vehicles and playsets (collectively “Wheels”) and Batman^™, CARS^™, Superman^™, Radica:^® products, and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands—including Fisher-Price^®, Little People^®, BabyGear^™ and View-Master^® (collectively “Core Fisher-Price^®”), Sesame Street^®, Dora the Explorer^™, Go-Diego-Go!^™, Winnie the Pooh, InteracTV^™ and See ‘N Say^® (collectively “Fisher-Price^® Friends”) and Power Wheels^®.

American Girl Brands—including Just Like You^™, the historical collection and Bitty Baby^®. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers.

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On October 10, 2005, Mattel announced the consolidation of its domestic Mattel Girls & Boys Brands and Fisher-Price Brands divisions into one division. The creation of the “Mattel Brands” division, which resulted in the consolidation of some management and support functions, preserves the natural marketing and design groups that are empowered to create and market toys based on gender and age groups and is expected to more effectively and efficiently leverage Mattel’s scale. These changes are consistent with Mattel’s ongoing goals to enhance innovation and improve execution. In connection with this consolidation, Mattel executed an initiative in 2006 to streamline its workforce, primarily in El Segundo, California. The consolidation of these divisions did not change Mattel’s operating segments.

Management believes that the business environment for Mattel in 2007 will be similar to that of 2006. Mattel expects to continue facing challenges both domestically and internationally as retailers continue to tightly manage inventory. Additionally, Mattel has experienced continued cost pressures in the areas of product costs, including oil-based resin and zinc, and employee-related costs. Management believes that Mattel will continue to encounter a challenging retail environment, along with cost pressures and the possibility of sales declines in the Barbie^® brand.

Mattel’s objective is to continue to create long-term shareholder value by generating strong cash flow and deploying it in a disciplined and opportunistic manner as outlined in Mattel’s capital and investment framework. To achieve this objective, management has established three overarching goals.

The first goal is to enhance innovation in order to reinvigorate the Barbie^® brand, while maintaining growth in other core brands by continuing to develop popular toys. Additionally, Mattel plans to pursue additional licensing arrangements and strategic partnerships to extend its portfolio of brands into areas outside of traditional toys.

The second goal is to improve execution in areas including manufacturing, distribution and selling. In 2006, Mattel is continuing to focus on improving the efficiency of its supply chain using Lean supply chain initiatives. The objective of the Lean program is to improve the flow of processes, do more with less and focus on the value chain from beginning to end.

The third goal is to further capitalize on Mattel’s scale advantage. For example, as the world’s largest toy company, Mattel believes it can realize cost savings when making purchasing decisions based on a One Mattel philosophy.

Results of Operations

2006 Compared to 2005

Consolidated Results

Net sales for 2006 were $5.65 billion, a 9% increase compared to $5.18 billion in 2005, including a 1 percentage point benefit from changes in currency exchange rates. Net income for 2006 was $592.9 million, or $1.53 per diluted share, as compared to net income of $417.0 million, or $1.01 per diluted share, for 2005.

Gross profit, as a percentage of net sales, increased to 46.2% in 2006 from 45.8% in 2005. The increase in gross profit was driven by price increases and savings from supply chain initiatives, which were partially offset by unfavorable mix, external cost pressures and higher royalty costs.

Income before income taxes as a percentage of net sales declined to 12.1% in 2006 from 12.6% in 2005. Contributing to this decline were higher selling and administrative expenses as a percentage of net sales and lower other non-operating income, partially offset by higher gross margins and lower advertising expenses as a percentage of net sales. Higher selling and administrative expenses were primarily attributed to increased incentive compensation accruals, stock-based compensation including a pre-tax charge of $19.3 million for prior

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period unintentional stock option accounting errors (see Item 8 “Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements”), costs associated with the opening of the third American Girl Place^® retail store in April 2006 and the acquisition of Radica in October 2006, partially offset by savings related to the streamlining of the Mattel Brands organization. Other non-operating (income), net in 2005 included gains from the sale of marketable securities of $25.8 million. There were no gains or losses from the sale of marketable securities in 2006.

Net income in 2006 was positively impacted by the Tax Act passed in May, and income tax benefits of $63.0 million related to settlements of multiple ongoing audits by foreign tax authorities and a settlement with a state tax authority for tax years 1997 and 1998. Net income in 2005 was negatively impacted by incremental tax expense of $107.0 million, resulting from Mattel’s decision to repatriate $2.4 billion in previously unremitted foreign earnings under The American Jobs Creation Act (the “Jobs Act”), partially offset by $38.6 million of tax benefits primarily relating to audit settlements with certain tax authorities in both the US and abroad.

Shares repurchased under Mattel’s share repurchase program resulted in a benefit to Mattel’s earnings per share in 2006 when compared to 2005, by reducing the average number of common shares outstanding. Since inception of the share repurchase program in July 2003, Mattel has repurchased 68.1 million shares, representing 15% of common shares outstanding.

The following table provides a summary of Mattel’s consolidated results for 2006 and 2005 (in millions, except percentage and basis point information):

	For the Year
	2006					2005					Year/Year Change
	Amount			% of Net Sales		Amount			% of Net Sales		%		Basis Points of Net Sales
Net sales	$	5,650.2		100.0	%	$	5,179.0		100.0	%	9	%
Gross profit	$	2,611.8		46.2	%	$	2,372.9		45.8	%	10	%	40
Advertising and promotion expenses		651.0		11.5			629.1		12.1		3	%	(60	)
Other selling and administrative expenses		1,232.0		21.8			1,079.3		20.8		14	%	100
Operating income		728.8		12.9			664.5		12.8		10	%	10
Interest expense		79.9		1.4			76.5		1.5		4	%	(10	)
Interest (income)		(30.5	)	–0.5			(34.2	)	–0.7		–11	%	20
Other non-operating (income), net		(4.4	)				(29.8	)
Income before income taxes	$	683.8		12.1	%	$	652.0		12.6	%	5	%	(50	)

Sales

Net sales for 2006 were $5.65 billion, a 9% increase compared to $5.18 billion in 2005, including a 1 percentage point benefit from changes in currency exchange rates. Gross sales within the US increased 8% from 2005 and accounted for 56% of consolidated gross sales in 2006 and 2005. In 2006, gross sales in international markets increased 11% compared to 2005, including a 2 percentage point benefit from changes in currency exchange rates.

Worldwide gross sales of Mattel Girls & Boys Brands increased 9% to $3.42 billion in 2006 compared to 2005, including fourth quarter sales of Radica:^® products and a 1 percentage point benefit from changes in currency exchange rates. Domestic gross sales increased 10% and international gross sales increased 8%, including a 2 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Barbie^® were flat, including a 1 percentage point benefit from changes in currency exchange rates. Domestic gross sales of Barbie^® increased 3% and international gross sales of Barbie^® decreased 2%, including a 2 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Other Girls Brands

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increased 11% from 2005, including a 1 percentage point benefit from changes in currency exchange rates, primarily driven by strong sales of Polly Pocket!^™ and Pixel Chix^™ worldwide and the continued success of Winx Club^™ in international markets.

Worldwide gross sales in the Wheels category decreased 1% compared to 2005, including a 1 percentage point benefit from changes in currency exchange rates. Strong sales of Hot Wheels^® and Matchbox^® products internationally were more than offset by Hot Wheels^® sales declines in the US and Tyco^® R/C sales declines worldwide. Worldwide gross sales in the Entertainment category, which includes games and puzzles and Radica:^® products, increased by 34% compared to 2005, with no impact from changes in currency exchange rates. Excluding Radica:^® products, worldwide gross sales increases in the Entertainment category, were driven by the worldwide success of CARS^™ and Superman^™ products, which more than offset worldwide sales declines of Batman^™ and Yu-Gi-Oh!^™ products.

Worldwide gross sales of Fisher-Price Brands increased 12% to $2.27 billion in 2006 compared to 2005, including a 1 percentage point benefit from changes in currency exchange rates. Domestic gross sales increased 8%, while international gross sales increased 20%, including a benefit of 2 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Core Fisher-Price^® increased 11% compared to 2005, including a 1 percentage point benefit from changes in currency exchange rates, primarily driven by the worldwide success of BabyGear^™ and infant and newborn products. Worldwide gross sales of Fisher-Price^® Friends increased 19% compared to 2005, including a 1 percentage point benefit from changes in currency exchange rates, driven by several Nickelodeon properties including Go-Diego-Go!^™, Dora the Explorer^™, and The Backyardigans^™ and T.M.X^™ Elmo from Sesame Street^®.

Gross sales of American Girl Brands increased 1% to $440.0 million in 2006 compared to 2005, driven by the American Girl Place^® retail stores, including American Girl^®’s third store which opened in Los Angeles, California in April 2006. Growth in the retail stores was partially offset by a decline in the catalog business.

Cost of Sales

Cost of sales increased by $232.2 million, or 8%, from $2.81 billion in 2005 to $3.04 billion in 2006, as compared to a 9% increase in net sales. On an overall basis, cost of sales increased primarily due to increased sales volume. Within cost of sales, product costs increased by $204.9 million, or 9%, from $2.21 billion in 2005 to $2.42 billion in 2006, which was primarily driven by increased sales volume and higher external cost pressures, partially offset by cost savings realized from supply chain efficiency initiatives. Royalty expense increased by $35.6 million, or 16%, from $225.6 million in 2005 to $261.2 million in 2006, and is reflective of higher sales of licensed products in 2006. Freight and logistics expenses decreased by $8.2 million, or 2%, from $365.5 million in 2005 to $357.3 million in 2006. The decrease in freight and logistics expenses was primarily due to supply chain savings and distribution center efficiency initiatives, including strategies to shorten customer shipping distances, partially offset by increased sales volume.

Gross Profit

Gross profit, as a percentage of net sales, was 46.2% in 2006 compared to 45.8% in 2005. The increase in gross profit was driven by price increases and supply chain savings, which were partially offset by higher external cost pressures and unfavorable product mix, including higher royalty costs for licensed products.

Advertising and Promotion Expenses

Advertising and promotion expenses were 11.5% of net sales in 2006, compared to 12.1% in 2005 due primarily to overall higher sales volume and greater leverage in advertising spending. Mattel expects advertising spending levels for 2007 to be fairly consistent with its 11%-13% historical range to support its plan to invest in the business to drive long-term performance.

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Other Selling and Administrative Expenses

Other selling and administrative expenses were $1.23 billion in 2006, or 21.8% of net sales, compared to $1.08 billion in 2005, or 20.8% of net sales. The increase in other selling and administrative expenses in 2006 is primarily attributable to an $86.3 million increase in incentive compensation accruals, an increase of $27.3 million in stock-based compensation, including a pre-tax charge of $19.3 million for prior period unintentional stock option accounting errors (see Item 8 “Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements”), costs associated with the third American Girl Place^® retail store, and additional selling and administrative expenses for Radica (acquired in October 2006), partially offset by savings related to the 2006 streamlining of the Mattel Brands organization.

Non-Operating Items

Interest expense was $79.9 million in 2006 compared to $76.5 million in 2005 due to higher average long-term borrowings and higher short-term interest rates, partially offset by lower average short-term borrowings. Interest income decreased from $34.2 million in 2005 to $30.5 million in 2006 due to lower average invested cash balances. Other non-operating (income), net was $4.3 million compared to $29.8 million in 2005. Other non-operating income in 2005 included gains from the sale of marketable securities of $25.8 million. There were no gains or losses from the sale of marketable securities in 2006.

As of December 31, 2006 and 2005, Mattel held no marketable securities.

Provision for Income Taxes

Net income in 2006 was positively impacted by the Tax Act passed in May 2006, and income tax benefits of $63.0 million related to settlements of ongoing audits with foreign tax authorities and a settlement with a state tax authority for tax years 1997 and 1998, which were recorded in the first two quarters of 2006. Net income in 2005 was negatively impacted by incremental tax expense of $107.0 million, resulting from Mattel’s decision to repatriate $2.4 billion in previously unremitted foreign earnings under the Jobs Act, partially offset by $38.6 million of tax benefits primarily relating to audit settlements with certain tax authorities in both the US and abroad.

Operating Segment Results

Mattel’s operating segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US and American Girl Brands. Operating segment results should be read in conjunction with Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.”

Domestic Segment

Mattel Girls & Boys Brands US gross sales increased 10% in 2006 compared to 2005. Within this segment, gross sales of Barbie^® increased 3% and gross sales of Other Girls Brands decreased 5%. Gross sales in the Wheels category decreased 9% driven by sales declines in Hot Wheels^® and Tyco^® R/C product lines. Gross sales in the Entertainment category, which includes games and puzzles and Radica:^® products, increased 61% driven by the success of CARS^™ and Superman^™ products and Radica:^® products, which more than offset sales declines in Batman^™ and Yu-Gi-Oh!^™. Mattel Girls & Boys Brands US segment income increased 29% to $267.2 million in 2006, primarily due to higher sales volume and improved gross profit, partially offset by higher other selling and administrative expenses. The increase in gross profit is due to higher sales volume, including Radica:^® products, price increases and supply chain savings, partially offset by external cost pressures and unfavorable mix.

Fisher-Price Brands US gross sales increased 8%, reflecting an increase in sales of Core Fisher Price^® and Fisher Price^® Friends products. Sale increases in Core Fisher Price^® products reflected strong sales of

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BabyGear^™ and infant and newborn products. Sales increases in Fisher-Price^® Friends were driven by several Nickelodeon properties including Go-Diego-Go!^™, Dora the Explorer^™, and The Backyardigans^™ and Sesame Street^®. Fisher-Price Brands US segment income increased 25% to $216.1 million in 2006, primarily due to higher sales volume and improved gross profit resulting from price increases and favorable product mix, partially offset by higher external cost pressures.

American Girl Brands gross sales increased 1% from the prior year. American Girl Brands segment income decreased from $106.2 million to $97.0 million in 2006, primarily driven by higher other selling and administrative expenses associated with the American Girl Place^® retail store in Los Angeles which opened in 2006.

International Segment

The following table provides a summary of percentage changes in gross sales within the International segment in 2006 versus 2005:

Non-US Regions:	% Change in Gross Sales	Impact of Change in Currency Rates (in % pts)
Europe	9	2
Latin America	15	1
Asia Pacific	10	—
Other	12	4
Total International	11	2

International gross sales increased 11% in 2006 compared to 2005, including a 2 percentage point benefit from changes in currency exchange rates. Gross sales of Barbie^® decreased 2%, including a 2 percentage point benefit from changes in currency exchange rates. Gross sales of Other Girls Brands increased 26%, including a 3 percentage point benefit from changes in currency exchange rates, primarily driven by increased sales of Polly Pocket!^™, Pixel Chix^™ and Winx Club^™. Gross sales in the Wheels category grew by 7%, including a 2 percentage point benefit from changes in currency exchange rates, mainly driven by the success of Hot Wheels^® and Matchbox^® products, partially offset by Tyco^® R/C sales declines. Gross sales in the Entertainment category increased by 15%, mainly due to strong sales in CARS^™ and Superman^™ products, which more than offset decline in sales of Batman^™ and Yu-Gi-Oh!^™ products. Fisher-Price Brands gross sales increased 20%, including a 2 percentage point benefit from changes in currency exchange rates, due to increased sales of Core Fisher-Price^® products, primarily infant and newborn and BabyGear^™ products and growth in Fisher-Price^® Friends, mainly Dora the Explorer^™ and Go-Diego-Go!^™ properties, and T.M.X.^™ Elmo from Sesame Street^®. International segment income increased 33% to $419.1 million in 2006, as a result of an increase in sales volume, improved gross profit and benefits from changes in currency exchange rates. Improved gross profit resulted from price increases, partially offset by external cost pressures, unfavorable product mix, and higher royalty costs.

2005 Compared to 2004

Consolidated Results

Net sales for 2005 were $5.18 billion, a 1% increase compared to $5.10 billion in 2004, including a 1 percentage point benefit from changes in currency exchange rates. Net income for 2005 was $417.0 million, or $1.01 per diluted share, as compared to net income of $572.7 million, or $1.35 per diluted share, for 2004.

Gross profit, as a percentage of net sales, declined from 47.2% in 2004 to 45.8% in 2005. Higher external cost pressures, higher sales of lower margin products, including the impact of sales mix, and higher royalty costs

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were the primary drivers for the decline in gross profit, partially offset by a moderate price increase implemented in January 2005 and favorable changes in currency exchange rates.

Income before income taxes declined as a percentage of net sales in 2005 compared to 2004. Contributing to this decline were overall lower gross margins, higher selling, general and administrative costs due to upward cost pressures for employee-related expenses and ongoing investments in growth strategies including new product design and expansion of our American Girl Place^® retail stores, partially offset by lower incentive compensation, lower advertising expenses and favorable changes in currency exchange rates. Income before income taxes in 2004 was negatively impacted by a pre-tax charge of $16.2 million, primarily related to the elimination of approximately 285 positions as a result of headcount reductions, and integration of the Matchbox^® and Tyco^® R/C business into the Hot Wheels^® business in California, partially offset by net favorable legal settlements.

Net income in 2005 was negatively impacted by incremental tax expense of $107.0 million resulting from Mattel’s decision to repatriate $2.4 billion in previously unremitted foreign earnings under the Jobs Act, partially offset by $38.6 million of tax benefit primarily relating to audit settlements with certain tax authorities in both the US and abroad. Net income in 2004 was positively impacted by a $65.1 million tax benefit related to an audit settlement with the IRS.

Shares repurchased under Mattel’s share repurchase program resulted in a benefit to Mattel’s earnings per share in 2005 when compared to 2004, by reducing the average number of common shares outstanding.

The following table provides a summary of Mattel’s consolidated results for 2005 and 2004 (in millions, except percentage and basis point information):

	For the Year
	2005					2004					Year/Year Change
	Amount			% of Net Sales		Amount			% of Net Sales		%		Basis Points of Net Sales
Net sales	$	5,179.0		100.0	%	$	5,102.8		100.0	%	1	%
Gross profit	$	2,372.9		45.8	%	$	2,410.7		47.2	%	–2	%	(140	)
Advertising and promotion expenses		629.1		12.1			643.0		12.6		–2	%	(50	)
Other selling and administrative expenses		1,079.3		20.8			1,036.9		20.3		4	%	50
Operating income		664.5		12.8			730.8		14.3		–9	%	(150	)
Interest expense		76.5		1.5			77.8		1.5		–2	%	—
Interest (income)		(34.2	)	–0.7			(19.7	)	–0.4		74	%	(30	)
Other non-operating (income), net		(29.8	)				(23.5	)
Income before income taxes	$	652.0		12.6	%	$	696.2		13.6	%	–6	%	(100	)

Sales

Net sales for 2005 were $5.18 billion, a 1% increase compared to $5.10 billion in 2004, including a 1 percentage point benefit from changes in currency exchange rates. Gross sales within the US decreased 2% from 2004 and accounted for 56% of consolidated gross sales in 2005 compared to 58% in 2004. In 2005, gross sales in international markets increased 5% compared to 2004, including a 1 percentage point benefit from changes in currency exchange rates.

Worldwide gross sales of Mattel Girls & Boys Brands decreased 3% to $3.14 billion in 2005 compared to 2004, including a 1 percentage point benefit from changes in currency exchange rates. Domestic gross sales decreased 10% and international gross sales increased 3%, including a 1 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Barbie^® decreased 13% from 2004, including a

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1 percentage point benefit from changes in currency exchange rates. Domestic gross sales of Barbie^® decreased 21% and international gross sales of Barbie^® decreased 7%, including a 1 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Other Girls Brands increased 25% from 2004, including a 1 percentage point benefit from changes in currency exchange rates, primarily driven by sales of Disney Princesses, Pound Puppies^™ and Pixel Chix^™ worldwide, and Winx Club^™ in international markets. Worldwide gross sales in the Wheels category decreased 1% compared to 2004, including a 2 percentage point benefit from changes in currency exchange rates. International gross sales increases in the Hot Wheels^® and Tyco^® R/C product lines were more than offset by sales declines in the US. Worldwide gross sales in the Entertainment category were flat with the prior year, including a 2 percentage point benefit from changes in currency exchange rates. In the Entertainment category, growth in worldwide sales of Batman^™ products was partially offset by sales declines in Yu-Gi-Oh!^™ and Harry Potter^™ worldwide, and JuiceBox^™ in the US.

Worldwide gross sales of Fisher-Price Brands increased 5% to $2.02 billion in 2005 compared to 2004, with no impact from changes in currency exchange rates. Domestic gross sales increased 3%, while international gross sales grew low double digits. Worldwide gross sales of Core Fisher-Price^® increased 1% compared to 2004, with no impact from changes in currency exchange rates, primarily driven by infant products and continued growth in the BabyGear^™ line internationally. Worldwide gross sales of Fisher-Price^® Friends increased 18% compared to 2004, with no impact from changes in currency exchange rates, mainly attributable to the continued strength of the Dora the Explorer^™ property.

Gross sales of American Girl Brands increased 15% to $436.1 million in 2005 compared 2004, primarily due to continued strong performance of the American Girl Place^® retail stores and the direct channels, driven by the success of the Marisol^™ doll and book from the Just Like You^™ contemporary line, and doll and book products related to the American Girl^® live-action, made-for-TV movies.

Cost of Sales

Cost of sales increased by $114.1 million, or 4%, from $2.69 billion in 2004 to $2.81 billion in 2005, as compared to a 1% increase in net sales. On an overall basis, cost of sales increased primarily due to increased sales volume, external cost pressures, and higher royalty costs for licensed products. Within cost of sales, product costs increased by $74.7 million, or 3%, from $2.14 billion in 2004 to $2.21 billion in 2005, which was primarily driven by increased sales volume and external cost pressures. Royalty expense increased by $21.1 million, or 10%, from $204.5 million in 2004 to $225.6 million in 2005, and is reflective of higher sales of licensed products in 2005. Freight and logistics expenses increased by $18.2 million, or 5%, from $347.3 million in 2004 to $365.5 million in 2005, which was primarily driven by increased sales volume and external cost pressures.

Gross Profit

Gross profit, as a percentage of net sales, was 45.8% in 2005 compared to 47.2% in 2004. The decrease in gross profit, as a percentage of net sales, resulted from higher external cost pressures, higher sales of lower margin products, including the impact of sales mix, and higher royalty costs. These factors were partially offset by favorable changes in currency exchange rates and a moderate price increase implemented in January 2005.

Advertising and Promotion Expenses

Advertising and promotion expenses were 12.1% of net sales in 2005, compared to 12.6% in 2004.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $1.08 billion in 2005, or 20.8% of net sales, compared to $1.04 billion in 2004, or 20.3% of net sales. Other selling and administrative expenses increased in 2005, primarily due to the following:

• Higher external cost pressures and employee-related costs;

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• Investments in growth initiatives including new product design and development and higher overhead costs in 2005 associated with the third American Girl Place^® retail store that opened in April 2006; and

• Net favorable legal settlements in 2004 that did not recur in 2005.

The consolidation of its Mattel Girls & Boys Brands US and Fisher-Price Brands US divisions into one division included the elimination of executive-level positions and resulted in severance charges totaling $7.1 million in 2005, of which $6.1 million resulted from the elimination of the position of president of the Mattel Girls & Boys Brands US division. The overall increase in other selling and administrative expenses was partially offset by a $16.2 million charge for severance in 2004 related to the elimination of approximately 285 positions, resulting from headcount reductions and the relocation of the Matchbox^® and Tyco^® R/C brands from New Jersey to California and lower incentive compensation in 2005.

Non-Operating Items

Interest expense decreased from $77.8 million in 2004 to $76.5 million in 2005 due to lower average debt in 2005, partially offset by higher average short-term borrowing rates. Interest income increased from $19.7 million in 2004 to $34.2 million in 2005, primarily as a result of higher interest rates. Other non-operating (income), net was $29.8 million in 2005, comprised mainly of a $25.8 million gain from the sale of marketable securities. Other non-operating (income), net was $23.5 million in 2004, comprised mainly of a $22.1 million gain from the sale of marketable securities.

As of December 31, 2005, Mattel held no marketable securities. As of December 31, 2004, the pre-tax unrealized gains on marketable securities held by Mattel were $26.1 million ($16.4 million after-tax).

Provision for Income Taxes

Net income in 2005 was negatively impacted by incremental tax expense of $107.0 million, resulting from Mattel’s decision to repatriate $2.4 billion in previously unremitted foreign earnings under the Jobs Act and was positively impacted by $38.6 million of tax benefit primarily relating to audit settlements with certain tax authorities in both the US and abroad. Net income in 2004 was positively impacted by a $65.1 million tax benefit related to an audit settlement with the IRS.

Operating Segment Results

Mattel’s operating segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US and American Girl Brands. Operating Segment Results should be read in conjunction with Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.”

Domestic Segment

Mattel Girls & Boys Brands US gross sales decreased 10% in 2005 compared to 2004. Within this segment, gross sales of Barbie^® declined 21% and gross sales of Other Girls Brands increased double-digits, primarily driven by increased sales of Disney Princesses, Pound Puppies^™ and Pixel Chix^™. Gross sales in the Wheels category decreased 8% driven by sales declines in all the Wheels brands. Gross sales in the Entertainment category decreased double digits, primarily driven by sales declines in Yu-Gi-Oh!^™ and JuiceBox^™ which offset strong sales of Batman^™ products. Mattel Girls & Boys Brands US segment income decreased 37% to $206.5 million in 2005, primarily due to lower sales volume and a decline in gross profit resulting from increased sales of lower margin products, including the impact of sales mix, increased royalty costs and ongoing external cost pressures.

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Fisher-Price Brands US gross sales increased 3%, reflecting an increase in sales of Fisher-Price^® Friends, driven by the continued success of the Dora the Explorer^™ property. Sales increases in Fisher-Price^® Friends were partially offset by a decrease in sales of Power Wheels^® and a decrease in sales of Core Fisher Price^® products, which included strong sales of infant and BabyGear^™ lines. Fisher-Price Brands US segment income was $173.0 million in 2005, which was flat compared to 2004, primarily due to higher sales volume offset by higher employee-related costs, additional investment in product design and development, and ongoing external cost pressures.

American Girl Brands gross sales increased 15%, primarily as a result of the continued strong performance of the American Girl Place^® retail stores and the direct channels, driven by the success of the Marisol^™ doll and book from the Just Like You^™ contemporary line, and doll and book products related to the American Girl^® live-action, made-for-TV movies. American Girl Brands segment income increased 37% to $106.2 million in 2005, driven by higher sales volume, improved gross profit, and tight management of costs.

International Segment

The following table provides a summary of percentage changes in gross sales within the International segment in 2005 versus 2004:

Non-US Regions:	% Change in Gross Sales		Impact of Change in Currency Rates (in % pts)
Europe	—		(1	)
Latin America	23		8
Asia Pacific	7		2
Other	(3	)	5
Total International	5		1

International gross sales increased 5% in 2005 compared to 2004, including a 1 percentage point benefit from changes in currency exchange rates. Gross sales of Barbie^® decreased 7%, including a 1 percentage point benefit from changes in currency exchange rates and gross sales of Other Girls Brands increased double-digits, including a 2 percentage point benefit from changes in currency exchange rates, primarily driven by increased sales of Disney Princesses, Pound Puppies^™ and Winx Club^™. Gross sales in the Wheels category grew by mid single-digits in 2005 compared to 2004, mainly due to growth in sales of Hot Wheels^® products. Gross sales in the Entertainment category increased by double-digits in 2005 compared to 2004, primarily due to strong sales in the male-action properties including Batman^™, Robots^™ and MegaMan^™, partially offset by declines in Harry Potter^™ and Yu-Gi-Oh!^™ properties. Fisher-Price Brands gross sales increased 11%, including a 1 percentage point benefit from changes in currency exchange rates, due to strong growth in Core Fisher-Price^® products, primarily infant and BabyGear^™ lines, and Fisher-Price^® Friends, mainly Dora the Explorer^™ properties. International segment income increased 6% to $316.2 million in 2005, as a result of an increase in sales volume, benefits from changes in currency exchange rates and a modest price increase, partially offset by increased external cost pressures, higher employee-related costs and investments in emerging international markets.

Income Taxes

Mattel’s effective tax rate on income before income taxes in 2006 was 13.3% compared to 36.0% in 2005. The 2006 income tax provision includes a tax benefit $63.0 million related to settlements with foreign and state taxing authorities. Of the total benefit recorded, $57.5 million represents refunds of previously paid taxes, recorded as an expense in previous years. These refunds were recorded as a reduction to income tax expense in the period the refunds were received by Mattel. The balance of the tax benefit recorded in 2006 was a net reduction to total income tax reserves resulting from tax settlements with foreign and state tax authorities. The

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2006 income tax provision was also positively impacted by approximately $37 million as a result of the Tax Act passed in May 2006.

The 2005 income tax provision includes estimated US federal and state taxes of $107.0 million related to Mattel’s repatriation of $2.4 billion in qualifying dividends from Mattel’s foreign subsidiaries pursuant to the Jobs Act. The 2005 effective tax rate also includes a tax benefit of $38.6 million primarily related to audit settlements reached with certain tax authorities in both the US and abroad. In 2005, the IRS completed its examination of Mattel’s US federal income tax returns through 2003.

Liquidity and Capital Resources

Mattel’s primary sources of liquidity are its cash balances and access to short-term borrowing facilities. Cash flows from operations could be negatively impacted by decreased demand for Mattel’s products, which could result from factors such as adverse economic conditions and changes in public and consumer preferences, or by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as an inability to meet its debt covenant requirements, which include maintaining consolidated debt-to-capital and interest coverage ratios, or a deterioration of Mattel’s credit ratings. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.

Capital and Investment Framework

To guide future capital deployment decisions, with a goal of maximizing shareholder value, Mattel’s Board of Directors in 2003 established the following capital and investment framework:

• To maintain approximately $800 million to $1 billion in year-end cash available to fund a substantial portion of seasonal working capital;

• To maintain a year-end debt-to-capital ratio of about 25%;

• To invest approximately $180 million to $200 million in capital expenditures annually to maintain and grow the business;

• To make strategic acquisitions consistent with Mattel’s vision of providing “the world’s premier toy brands—today and tomorrow”; and

• To return excess funds to shareholders through dividends and share repurchases.

Over the long-term, assuming cash flows from operating activities remain strong, Mattel plans to use its free cash flows to invest in strategic acquisitions and to return funds to shareholders through cash dividends and, depending on market conditions, share repurchases. However, the ability to implement successfully the capital deployment plan is directly dependent on Mattel’s ability to generate strong cash flows from operating activities. There is no assurance that Mattel will continue to generate strong cash flows from operating activities or achieve its targeted goals from investing activities.

Operating Activities

Cash flows generated from operating activities were $875.9 million during 2006, compared to $466.7 million in 2005 and $570.4 million in 2004. The increase in cash flows from operating activities in 2006 from 2005 was primarily the result of higher net income and lower working capital, mainly due to higher levels of accounts payable and accrued expenses due primarily to higher incentive accruals, and the timing of vendor payments, partially offset by higher accounts receivable at December 31, 2006. The decrease in cash flows from operating activities in 2005 from 2004 was primarily due to lower net income and a change in working capital

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requirements, mainly due to payments made in 2005 related to year-end 2004 accruals to vendors and foreign tax authorities.

Investing Activities

On October 3, 2006, Mattel completed its acquisition of Radica for net cash paid of $196.4 million, which includes the purchase price and acquisition costs of $235.1 million, net of cash acquired of $38.7 million. Mattel’s acquisition of Radica is intended to maximize and combine the core competencies of each company, as well as provide growth opportunities internationally and for existing brands like Barbie^®, Hot Wheels^®, and Fisher-Price^®. See Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements.”

Cash flows used for investing activities were $314.8 million during 2006, primarily due to the acquisition of Radica, investments in tooling to support existing and new products and Mattel’s long-term information technology strategy, partially offset by proceeds from the sale of property, plant and equipment. Cash flows used for investing activities were higher in 2006 as compared to 2005 due to the Radica acquisition and lower proceeds from the sale of investments. Cash flows used for investing activities were lower in 2005 as compared to 2004 due to higher proceeds from the sale of investments and lower payments for business acquired in 2005, partially offset by higher investments in other property, plant and equipment in 2005 as a result of investment in Mattel’s long-term information technology strategy and spending associated with the construction of the new American Girl Place^® in Los Angeles. In 2004, Mattel used cash flows for investing activities of $108.1 million. Capital expenditures were partially offset by proceeds from the sale of investments and property, plant and equipment, primarily related to the disposal of property in Mexico that was no longer needed when manufacturing operations in Mexico were combined as part of the financial realignment plan.

Financing Activities

Cash flows used for financing activities decreased to $374.1 million in 2006 from $537.3 million in 2005 as a result of lower share repurchases, higher proceeds from the exercise of stock options, and the issuance of $300.0 million of Senior Notes in June 2006, which were partially offset by higher payments on short-term borrowings, the repayment of $175.0 million of the MAPS term loan facility in December 2006 and $50.0 million of Medium-term notes in May and September 2006 and increased dividend payments. Cash flows used for financing activities increased $71.0 million to $537.3 million in 2005 compared to 2004, primarily due to the repayment of $150.0 million of 6 1/8% senior notes in July 2005 and the 10.15% mortgage note for $39.1 million in November 2005 upon maturity, higher dividends paid and an increase in share repurchases in 2005, partially offset by $225.0 million of proceeds from the MAPS term loan facility and $100.0 million under the MAPS revolving loan facility.

The Board of Directors approved an increase to the share repurchase program of an additional $250.0 million in November 2003 and, at that time, there were share repurchase authorizations that had not been executed totaling $5.6 million. During 2004, Mattel repurchased 14.7 million shares at a cost of $255.1 million. In 2005, the Board of Directors approved the repurchase of an additional $500.0 million of Mattel’s common stock. During 2005, Mattel repurchased 28.9 million shares at a cost of $500.4 million, of which $487.1 million was paid during 2005. In January 2006, the Board of Directors authorized Mattel to increase its share repurchase program by an additional $250.0 million. During 2006, Mattel repurchased 11.8 million shares at a cost of $192.7 million. The total amount paid for share repurchases in 2006 was $205.9 million. At December 31, 2006, share repurchase authorizations of $57.3 million had not been executed. Repurchases take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date.

In 2006, 2005 and 2004, Mattel paid a $0.65 per share, $0.50 per share, and $0.45 per share dividend to holders of its common stock, respectively. The Board of Directors declared the dividend in November, and

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Mattel paid the dividend in December of each year. The dividend payments were $249.5 million, $200.5 million, and $186.9 million in 2006, 2005 and 2004, respectively.

Seasonal Financing

Mattel maintains and periodically amends or replaces a $1.3 billion domestic unsecured committed revolving credit facility with a commercial bank group that is used as the primary source of financing for the seasonal working capital requirements of its domestic subsidiaries. The agreement in effect was amended and restated in March 2005 and the expiration date of the facility was extended to March 23, 2010. The other terms and conditions of the amended and restated facility are substantially similar to those contained in the previous facility. Interest is charged at various rates selected by Mattel, ranging from market commercial paper rates to the bank reference rate. The domestic unsecured committed revolving credit facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet these financial covenant ratios at the end of each fiscal quarter and fiscal year, using the formulae specified in the credit agreement to calculate the ratios. Mattel was in compliance with such covenants at the end of each fiscal quarter and fiscal year in 2006. As of December 31, 2006, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.29 to 1 (compared to a maximum allowed of 0.50 to 1) and Mattel’s interest coverage ratio was 11.72 to 1 (compared to a minimum allowed of 3.50 to 1).

On December 9, 2005, Mattel, MAPS, a wholly-owned subsidiary of Mattel, Bank of America, N.A., as a lender and administrative agent, and other financial institutions executed a credit agreement (“the MAPS facility”) which provides for (i) a term loan facility of $225.0 million consisting of a term loan advanced to MAPS in the original principal amount of $225.0 million, with $50.0 million of such amount to be repaid on each of December 15, 2006 and December 15, 2007, and the remaining aggregate principal amount of $125.0 million to be repaid on December 9, 2008, and (ii) a revolving loan facility consisting of revolving loans advanced to MAPS in the maximum aggregate principal amount at any time outstanding of $100.0 million, with a maturity date of December 9, 2008. Interest is charged at various rates selected by Mattel based on Eurodollar rates or bank reference rates. On December 15, 2006, in addition to the required payment of $50.0 million, MAPS prepaid an incremental $125.0 million of the MAPS term loan facility. The remaining $50.0 million principal amount, consisting of $14.3 million due on December 15, 2007 and $35.7 million due on December 9, 2008, was prepaid on January 16, 2007. As of December 31, 2006, there was no balance outstanding on the MAPS revolving loan facility. In connection with the MAPS facility, Mattel executed a Continuing Guaranty Agreement pursuant to which Mattel unconditionally guaranteed the obligations of MAPS arising pursuant to the MAPS facility. The MAPS facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios at the end of each fiscal quarter and fiscal year, using the formulae specified and ratios allowed in the MAPS facility to calculate the ratios. The formulae specified in the MAPS facility are the same as those required by the domestic unsecured committed revolving credit facility. Mattel was in compliance with such covenants at December 31, 2006.

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. As of December 31, 2006, foreign credit lines totaled approximately $200 million, a portion of which are used to support letters of credit. Mattel expects to extend the majority of these credit lines throughout 2007.

In June 2006, Mattel issued $100.0 million of unsecured floating rate senior notes (“Floating Rate Senior Notes”) due June 15, 2009 and $200.0 million of unsecured 6.125% senior notes (“6.125% Senior Notes”) due June 15, 2011 (collectively “Senior Notes”). Interest on the Floating Rate Senior Notes is based on the three-month US Dollar London Interbank Offered Rate (“LIBOR”) plus 40 basis points with interest payable quarterly beginning September 15, 2006. Interest on the 6.125% Senior Notes is payable semi-annually beginning December 15, 2006. The 6.125% Senior Notes may be redeemed at any time at the option of Mattel at a redemption price equal to the greater of (i) the principal amount of the notes being redeemed plus accrued

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interest to the redemption date, or (ii) a “make whole” amount based on the yield of a comparable US Treasury security plus 20 basis points.

In June 2006, Mattel entered into two interest rate swap agreements on the $100.0 million Floating Rate Senior Notes, each in a notional amount of $50.0 million, for the purpose of hedging the variability of cash flows in the interest payments due to fluctuations of the LIBOR benchmark interest rate. These cash flow hedges are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, whereby the hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in accumulated other comprehensive loss. Under the terms of the agreements, Mattel receives quarterly interest payments from the swap counterparties based on the three-month LIBOR plus 40 basis points and makes semi-annual interest payments to the swap counterparties based on a fixed rate of 5.87125%. The three-month LIBOR rate used to determine interest payments under the interest rate swap agreements resets every three months, matching the variable interest on the Floating Rate Senior Notes. The agreements expire in June 2009, which corresponds with the maturity of the Floating Rate Senior Notes.

In October 2005, a major credit rating agency maintained its long-term rating for Mattel at BBB, but changed its long-term outlook to negative and reduced its short-term rating to A-3. In March 2006, this same credit rating agency reduced Mattel’s long-term credit rating to BBB- and changed the outlook from negative to stable. Also in October 2005, another major credit rating agency maintained its long-term rating for Mattel at Baa2, but changed its long-term outlook to negative. In May 2006, another major credit rating agency reduced Mattel’s long-term credit rating to BBB. Management does not expect these actions to have a significant impact on Mattel’s ability to obtain financing or to have a significant negative impact on Mattel’s liquidity or results of operations.

Mattel believes its cash on hand at the beginning of 2007, amounts available under its domestic unsecured committed revolving credit facility, the MAPS facility, and its foreign credit lines will be adequate to meet its seasonal financing requirements in 2007. As of December 31, 2006, Mattel had available incremental borrowing resources totaling approximately $1.3 billion under its domestic unsecured committed revolving credit facility, the MAPS facility and foreign credit lines.

Mattel has a $300.0 million domestic receivables sales facility that is a sub-facility of Mattel’s domestic unsecured committed revolving credit facility. The outstanding amount of receivables sold under the domestic receivables facility may not exceed $300.0 million at any given time, and the amount available to be borrowed under the credit facility is reduced to the extent of any such outstanding receivables sold. Under the domestic receivables facility, certain trade receivables are sold to a group of banks, which currently include, among others, Bank of America, N.A., as administrative agent, Citicorp USA, Inc. and Barclays Bank PLC, as co-syndication agents, and Societe Generale and BNP Paribas, as co-documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell eligible trade receivables from Wal-Mart and Target to Mattel Factoring, Inc. (“Mattel Factoring”), a Delaware corporation and wholly-owned, consolidated subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. Pursuant to the terms of the domestic receivables facility and simultaneous with each receivables purchase, Mattel Factoring sells those receivables to the bank group. Mattel records the transaction, reflecting cash proceeds and sale of accounts receivable in its consolidated balance sheet, at the time of the sale of the receivables to the bank group.

Sales of receivables pursuant to the domestic receivables sale facility occur periodically, generally quarterly. The receivables are sold by Mattel Sales Corp. and Fisher-Price, Inc. to Mattel Factoring for a purchase price equal to the nominal amount of the receivables sold. Mattel Factoring then sells such receivables to the bank group at a slight discount, and Mattel acts as a servicer for such receivables. Mattel has designated Mattel Sales Corp. and Fisher-Price, Inc. as sub-servicers, as permitted by the facility. Mattel’s appointment as a servicer is subject to termination events that are customary for such transactions. The domestic receivables sales facility is also subject to conditions to funding, representations and warranties, undertakings and early termination events

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that are customary for transactions of this nature. Mattel retains a servicing interest in the receivables sold under this facility.

Until the Master Agreement was terminated on February 9, 2007, Mattel International Holdings B.V., a company incorporated in the Netherlands (the “Depositor”), Mattel France, a company incorporated in France (“Mattel France”), and Mattel GmbH, a company incorporated in Germany (“Mattel Germany”), each of which is a subsidiary of Mattel, and Societe Generale Bank Nederland N.V. (“SGBN”), were parties to a Master Agreement for the Transfer of Receivables that established a Euro 150 million European trade receivables facility (the “European trade receivables facility”), pursuant to which Mattel France and Mattel Germany sold trade receivables to SGBN. The European trade receivables facility was subject to conditions to funding, representations and warranties, undertakings and early termination events that were customary for transactions of this nature.

Sales of receivables pursuant to the European trade receivables facility occurred monthly, with the last such sale occurring on January 10, 2007. The receivables were sold by Mattel France and Mattel Germany directly to SGBN for a purchase price equal to the nominal amount of the receivables sold. As a result, no Mattel subsidiary was used as a special purpose entity in connection with these transactions. A portion of the purchase price was funded by SGBN and a portion by a deposit provided by the Depositor. The amount of the deposit was reset on each date on which new receivables were sold. During the 12-month period ending December 31, 2006, the deposit was, on average, equal to about 51% of the aggregate notional amount of sold receivables outstanding during such period.

As with the domestic receivables facility, each sale of accounts receivable was recorded in Mattel’s consolidated balance sheet at the time of such sale. Under the European trade receivables facility, the outstanding amount of receivables sold could not exceed Euro 60 million from February 1 through July 31 of each year and could not exceed Euro 150 million at all other times.

Each of Mattel France and Mattel Germany was appointed to service the receivables sold by it to SGBN. No servicing fees were paid by SGBN for such services. The appointment of each of Mattel France and Mattel Germany to act as servicer was subject to termination events that were customary for transactions of this nature.

Mattel France and Mattel Germany were obligated to pay certain fees to the Depositor in consideration of the Depositor providing the deposit to SGBN. During the 12-month period ending December 31, 2006, fees paid by Mattel France and Mattel Germany to the Depositor were, on average, approximately 0.11% of the aggregate notional amount of sold receivables outstanding during such period.

In November 2006, the commitment termination date for the European trade receivables facility was extended until February 28, 2007. However, effective on February 9, 2007, the Depositor, Mattel France and Mattel Germany terminated the European trade receivable facility with SGBN. The Company determined the facility was no longer necessary based on projected international cash flows and seasonal financing needs.

The outstanding amounts of accounts receivable that have been sold under these facilities and other factoring arrangements, net of collections from customers, have been excluded from Mattel’s consolidated balance sheets and are summarized as follows (in thousands):

	December 31,
	2006		2005
Receivables sold pursuant to the:
Domestic receivables facility	$	255,871	$	251,372
European receivables facility		103,886		95,946
Other factoring arrangements		52,505		95,763
	$	412,262	$	443,081

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Financial Position

Mattel’s cash and equivalents were $1,205.6 million at December 31, 2006, an increase of $207.8 million from 2005. The increase was primarily driven by cash flows generated from operating activities of $875.9 million, proceeds from the issuance of $300.0 million of Senior Notes in June 2006, and proceeds from the exercise of stock options of $116.9 million, partially offset by dividend payments of $249.5 million, share repurchases of $205.9 million, acquisition of Radica in October 2006 for net cash paid of $196.4 million (which includes the purchase price and acquisition costs of $235.1 million, net of cash acquired of $38.7 million), and repayments of $100.0 million on the MAPS revolving loan facility, $175.0 million on the MAPS term loan facility, and $50.0 million on the Medium-term notes. Accounts receivable increased by $183.2 million to $943.8 million at December 31, 2006, reflecting increased fourth quarter sales and lower factored receivables. Management expects to collect the majority of these receivables in the first quarter of 2007. Inventory levels were relatively consistent year over year. Based on its analysis of point of sale information for its top US customers, management believes that inventory levels of Mattel products at retail were slightly lower at December 31, 2006 than 2005.

Current portion of long-term debt decreased $35.7 million to $64.3 million at December 31, 2006, compared to December 31, 2005 primarily due to the $50.0 million payment on the MAPS term loan facility in December 2006, partially offset by the reclassification of $14.3 million of the remaining $50.0 million on the MAPS term loan facility from long-term debt. Accounts payable and accrued liabilities increased $293.9 million from December 31, 2005 to $1.4 billion at December 31, 2006, mainly due to changes in currency exchange rates, increased amounts due to third party manufacturers, and higher incentive compensation and royalty accruals.

A summary of Mattel’s capitalization is as follows (in millions, except percentage information):

	December 31,
	2006				2005
Medium-term notes	$	300.0	9	%	$	350.0	12	%
Senior Notes		300.0	9			—	—
MAPS term loan		35.7	1			175.0	6
Total noncurrent long-term debt		635.7	19			525.0	18
Other noncurrent liabilities		304.7	9			282.4	10
Stockholders’ equity		2,433.0	72			2,101.7	72
	$	3,373.4	100	%	$	2,909.1	100	%

Total noncurrent long-term debt increased $110.7 million at December 31, 2006 compared to December 31, 2005 due to the aforementioned proceeds from the issuance of $300.0 million of Senior Notes, partially offset by the $125.0 million prepayment of the MAPS term loan facility and the reclassification of $14.3 million of the MAPS term loan facility and $50.0 million of Medium-term notes to current portion of long-term debt. Mattel expects to satisfy its future long-term capital needs through the generation of corporate earnings and issuance of long-term debt instruments. Stockholders’ equity of $2.4 billion at December 31, 2006 increased $331.2 million from December 31, 2005, primarily as a result of current year net income and the exercise of stock options partially offset by share repurchases and payment of the annual dividend on common stock in the fourth quarter of 2006.

Mattel’s debt-to-capital ratio, including short-term borrowings and the current portion of long-term debt decreased to 22.3% at December 31, 2006 from 26.1% at December 31, 2005 due to higher net income in 2006, higher stock option exercises, the repayment of all short-term borrowings outstanding at December 31, 2005 and the repayment of $175.0 million on the MAPS term loan facility, partially offset by share repurchases, the annual dividend payment, and proceeds from the issuance of $300.0 million of Senior Notes. Mattel’s objective is to continue to maintain a year-end debt-to-capital ratio of approximately 25%.

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Off-Balance Sheet Arrangements

Mattel has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders.

Commitments

In the normal course of business, Mattel enters into debt agreements, contractual arrangements to obtain and protect Mattel’s right to create and market certain products, and for future purchases of goods and services to ensure availability and timely delivery. These arrangements include commitments for future inventory purchases and royalty payments pursuant to licensing agreements. Certain of these commitments routinely contain provisions for guaranteed or minimum expenditures during the term of the contracts.

	Total		2007		2008		2009		2010		2011		Thereafter
Long-term debt	$	700.0	$	64.3	$	85.7	$	150.0	$	50.0	$	250.0	$	100.0
Interest on long-term debt		163.7		44.3		39.4		31.0		24.8		15.3		8.9
Capital leases*		8.8		0.3		0.3		0.3		0.3		0.3		7.3
Operating leases		487.0		71.0		58.0		48.0		42.0		40.0		228.0
Purchases of inventory, other assets and services		372.9		372.9		—		—		—		—		—
Licensing minimum guarantees		135.0		39.0		38.0		24.0		21.0		13.0		—
Defined benefit and postretirement benefit plans		266.5		24.6		24.9		24.5		23.9		24.3		144.3
Total	$	2,133.9	$	616.4	$	246.3	$	277.8	$	162.0	$	342.9	$	488.5

* Represents total obligation, including imputed interest of $6.5 million.

Litigation

Litigation Related to LeapFrog Enterprises, Inc.

Fisher-Price, Inc. (“Fisher-Price”), a subsidiary of Mattel, was sued for patent infringement by LeapFrog Enterprises, Inc. in a lawsuit filed in October 2003 in the United States District Court for the District of Delaware, and in September 2004, Mattel was joined to the lawsuit as a defendant. The lawsuit alleged that Fisher-Price’s PowerTouch^™ system infringed a LeapFrog patent relating to an electronic learning device for teaching phonics. A 10-day trial commenced on May 16, 2005, which resulted in a deadlocked jury. As an alternative to retrying the case, the parties agreed to submit the case for decision, based on the existing trial record, to the presiding judge. The plaintiff in this lawsuit asserted a total damages claim of up to approximately $90 million, which was reduced to approximately $58 million pursuant to rulings by the Court, and sought an injunction preventing the further sale of the PowerTouch^™ system; the damages could possibly have been trebled if a willful infringement had been found. On March 30, 2006, the Court issued a Memorandum and Order holding that Mattel and Fisher-Price did not infringe LeapFrog’s patent and furthermore holding that LeapFrog’s patent claim, which was the basis of LeapFrog’s lawsuit, was invalid due to obviousness. On May 1, 2006, LeapFrog filed an appeal of the Court’s ruling with the Court of Appeals for the Federal Circuit. Both parties have filed their briefs with regard to the appeal, and the Court of Appeals has scheduled a hearing on March 7, 2007 for oral arguments. Mattel and its subsidiary Fisher-Price continue to believe the action is without merit and intend to continue defending themselves vigorously.

Litigation Related to Carter Bryant and MGA Entertainment, Inc.

In April 2004, Mattel filed a lawsuit in Los Angeles County Superior Court against Carter Bryant (“Bryant”), a former Mattel design employee. The suit alleges that Bryant aided and assisted a Mattel competitor,

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MGA Entertainment, Inc. (“MGA”), during the time he was employed by Mattel, in violation of his contractual and other duties to Mattel. In September 2004, Bryant asserted counterclaims against Mattel, including counterclaims in which Bryant sought, as a putative class action representative, to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees. In December 2004, MGA intervened as a party-defendant in Mattel’s action against Bryant, asserting that its rights to the “Bratz” property are at stake in the litigation. Mattel’s suit was removed to the United States District Court for the Central District of California.

Separately, in November 2004, Bryant filed an action against Mattel in the United States District Court for the Central District of California. The action sought a judicial declaration that Bryant’s purported conveyance of rights in “Bratz” was proper and that he did not misappropriate Mattel property in creating “Bratz.”

In April 2005, MGA filed suit against Mattel in the United States District Court for the Central District of California. MGA’s action alleges claims of trade dress infringement, trade dress dilution, false designation of origin, unfair competition and unjust enrichment. The suit alleges, among other things, that certain products, themes, packaging and/or television commercials in various Mattel product lines have infringed upon products, themes, packaging and/or television commercials for various MGA product lines, including “Bratz.” The complaint also asserts that various alleged Mattel acts with respect to unidentified retailers, distributors and licensees have damaged MGA and that various alleged acts by industry organizations, purportedly induced by Mattel, have damaged MGA. MGA’s suit alleges that MGA has been damaged in an amount “believed to reach or exceed tens of millions of dollars” and further seeks punitive damages, disgorgement of Mattel’s profits and injunctive relief.

In June 2006, the three cases were consolidated in the United States District Court for the Central District of California. On July 17, 2006, the Court issued an order dismissing all claims that Bryant had asserted against Mattel, including Bryant’s purported counterclaims to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees, and Bryant’s claims for declaratory relief. Although Bryant was given leave by the Court to file amended claims consistent with the Court’s rulings, Bryant did not do so within the time period allowed. Mattel believes the claims against it are without merit and intends to continue to vigorously defend against them.

In November 2006, Mattel asked the Court for leave to file an Amended Complaint that included not only additional claims against Bryant, but also included claims for copyright infringement, RICO violations, misappropriation of trade secrets, intentional interference with contract, aiding and abetting breach of fiduciary duty and breach of duty of loyalty, and unfair competition, among others, against MGA Entertainment, Inc., Isaac Larian, certain MGA affiliates and an MGA employee. The basis for the Amended Complaint was the MGA defendants’ infringement of Mattel’s copyrights and their pattern of misappropriation of trade secrets and unfair competition in violation of the applicable statutes. On January 12, 2007, the Court allowed Mattel to file these claims as counterclaims in the consolidated cases, which Mattel did that same day. Neither Bryant nor the MGA defendants have responded to the counterclaims.

Environmental

Beaverton, Oregon

Mattel previously operated a manufacturing facility on a leased property in Beaverton, Oregon that was acquired as part of the March 1997 merger with Tyco Toys, Inc. In March 1998, samples of groundwater used by the facility for process water and drinking water disclosed elevated levels of certain chemicals, including trichloroethylene. Mattel immediately closed the water supply and self-reported the sample results to the Oregon Department of Environmental Quality (“ODEQ”) and the Oregon Health Division. Mattel also implemented a community outreach program to employees, former employees and surrounding landowners.

Prior to 2003, Mattel recorded pre-tax charges totaling $19.0 million related to this property. During 2004 and 2003, Mattel recognized pre-tax income of $0.9 million and $7.9 million, respectively, representing

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adjustments to the reserve accrued in 1999 associated with the closure of the Beaverton facility. Costs totaling approximately $7.0 million have been incurred through December 31, 2006 for the Beaverton property, largely related to environmental remediation, attorney fees, consulting work and an employee medical screening program. In January 2003, Mattel entered into a settlement with the ODEQ resolving its cleanup liability in return for a contribution of $0.4 million to the cleanup, which is being performed by the company that caused the contamination. The remaining liability of approximately $3.2 million as of December 31, 2006 represents estimated amounts to be incurred for employee medical screening, project management, and other costs related to the Beaverton property.

General

Mattel is also involved in various other litigation and legal matters, including claims related to intellectual property, product liability and labor, as well as environmental matters, which Mattel is addressing or defending in the ordinary course of business. Management believes that any liability that may potentially result upon resolution of such matters will not have a material adverse effect on Mattel’s business, financial condition or results of operations.

Effects of Inflation

Inflation rates in the US and in major foreign countries where Mattel does business have not had a significant impact on its results of operations or financial position during 2006, 2005 or 2004. The US Consumer Price Index increased 2.5% in 2006, 3.4% in 2005 and 3.3% in 2004. Mattel receives some protection from the impact of inflation from high turnover of inventories and its ability under certain circumstances at certain times to pass on higher prices to its customers.

Employee Savings Plan

Mattel sponsors a 401(k) savings plan, the Mattel Personal Investment Plan, for its domestic employees. Mattel makes employer contributions in cash and allows employees to allocate both their voluntary contributions and their employer automatic and matching contributions to a variety of investment funds, including a fund that is fully invested in Mattel common stock (the “Mattel Stock Fund”). Employees are not required to allocate any funds to the Mattel Stock Fund, which allows employees to limit or eliminate their exposure to market changes in Mattel’s stock price. Furthermore, Mattel’s plan limits an employee’s maximum allocation to the Mattel Stock Fund a percentage of the employee’s total account balance, which is currently 25%. Employees may generally reallocate their account balances on a daily basis. The only limitation on the frequency of reallocations applies to changes involving the Mattel Stock Fund by employees classified as insiders or restricted personnel under Mattel’s insider trading policy. Pursuant to Mattel’s insider trading policy, insiders and restricted personnel are limited to certain periods in which they may make allocations into or out of the Mattel Stock Fund.

Application of Critical Accounting Policies and Estimates

Mattel makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those Mattel considers most critical in preparing its consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of its Board of Directors, and the Audit Committee has reviewed the disclosures included below. The following is a review of the accounting policies and estimates that include significant judgments made by management using information available at the time the estimates are made. As described below, however, these estimates could change materially if different information or assumptions were used instead.

Note 1 to the consolidated financial statements includes a summary of Mattel’s significant accounting policies, estimates, and methods used in the preparation of Mattel’s consolidated financial statements. In most

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instances, Mattel must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America. See Item 8 “Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements.”

Accounts Receivable—Allowance for Doubtful Accounts

The allowance for doubtful accounts represents adjustments to customer trade accounts receivable for amounts deemed partially or entirely uncollectible. Management believes the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including other selling and administrative expenses, net income and accounts receivable. In addition, the allowance requires a high degree of judgment since it involves estimation of the impact of both current and future economic factors in relation to its customers’ ability to pay amounts owed to Mattel.

Mattel’s products are sold throughout the world. Products within the Domestic segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers. Products within the International segment are sold directly to retailers and wholesalers in Canada and most European, Asian and Latin American countries, and through agents and distributors in those countries where Mattel has no direct presence.

In recent years, the mass-market retail channel has experienced significant shifts in market share among competitors, causing some large retailers to experience liquidity problems. In addition, many of Mattel’s customers have been negatively impacted by worsening economic conditions. From 2001 through early 2004, four large customers of Mattel filed for bankruptcy. Mattel’s sales to customers are typically made on credit without collateral and are highly concentrated in the third and fourth quarters due to the cyclical nature of toy sales, which results in a substantial portion of trade receivables being collected during the latter half of the year and the first quarter of the following year. There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy or other factors beyond the control of Mattel. This could increase Mattel’s exposure to losses from bad debts.

On a consolidated basis, a small number of customers account for a large share of Mattel’s net sales and accounts receivable. For 2006, Mattel’s three largest customers, Wal-Mart, Toys “R” Us and Target, in the aggregate, accounted for approximately 43% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 52% of net sales. As of December 31, 2006, Mattel’s three largest customers accounted for approximately 22% of net accounts receivable, and its ten largest customers accounted for approximately 27% of net accounts receivable. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the US. The customers and the degree of concentration vary depending upon the region or nation. The concentration of Mattel’s business with a relatively small number of customers may expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to experience financial difficulty.

Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Revenue is recognized provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured. Credit limits and payment terms are established based on the underlying criteria that collectibility must be reasonably assured at the levels set for each customer. Extensive evaluations are performed on an ongoing basis throughout the fiscal year of each customer’s financial performance, cash generation, financing availability and liquidity status. Customers are reviewed at least annually, with more frequent reviews being performed if necessary, based on the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses prior to shipping to those customers on credit. Customer terms and credit limits are adjusted, if necessary, to reflect the results of the review. Mattel uses a variety of financial arrangements to ensure

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collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring or purchasing various forms of credit insurance with unrelated third parties or requiring cash in advance of shipment.

The following table summarizes Mattel’s allowance for doubtful accounts at December 31 (in millions, except percentage information):

	2006			2005			2004
Allowance for doubtful accounts	$	19.4		$	24.6		$	32.8
As a percentage of total accounts receivable		2.0	%		3.1	%		4.1	%

Mattel’s allowance for doubtful accounts is based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging and customer disputes. When circumstances arise or a significant event occurs that comes to the attention of management, such as a bankruptcy filing of a customer, the allowance is reviewed for adequacy and adjusted to reflect the change in the estimated amount to be received from the customer. Changes in the allowance for doubtful accounts between December 31, 2006 and 2005 reflect management’s assessment of the factors noted above, including past due accounts, disputed balances with customers, and the financial condition of customers. The allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off.

Mattel believes that its allowance for doubtful accounts at December 31, 2006 is adequate and proper. However, as described above, Mattel’s business is greatly dependent on a small number of customers. Should one or more of Mattel’s major customers experience liquidity problems, then the allowance for doubtful accounts of $19.4 million, or 2.0% of accounts receivable, at December 31, 2006 may not prove to be sufficient to cover such losses. Any incremental bad debt charges would negatively affect the results of operations of one or more of Mattel’s business segments.

Inventories—Allowance for Obsolescence

Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Inventory obsolescence reserves are recorded for damaged, obsolete, excess and slow-moving inventory. Management believes that the accounting estimate related to the allowance for obsolescence is a “critical accounting estimate” because changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income and inventories. In addition, the valuation requires a high degree of judgment since it involves estimation of the impact resulting from both current and expected future events. As more fully described below, valuation of Mattel’s inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in the buying patterns of both retailers and consumers and inventory management of customers.

In the toy industry, orders are subject to cancellation or change at any time prior to shipment since actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers and overall economic conditions. Unexpected changes in these factors could result in excess inventory in a particular product line, which would require management to make a valuation estimate on such inventory.

Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research and current market information. Mattel ships products in accordance with delivery schedules specified by its customers, who usually request delivery within three months. In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year. These seasonal purchasing patterns and requisite production lead times cause risk to

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Mattel’s business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase inventory valuation risk since Mattel may not be able to meet demand for certain products at peak demand times, or Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed.

Additionally, current conditions in the domestic and global economies are uncertain. As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts of the economy, including the markets in which Mattel participates. Because all components of Mattel’s budgeting and forecasting are dependent upon estimates of growth or contraction in the markets it serves and demand for its products, the prevailing economic uncertainties render estimates of future demand for product more difficult. Such economic changes may affect the sales of Mattel’s products and its corresponding inventory levels, which would potentially impact the valuation of its inventory.

At the end of each quarter, management within each business segment, Mattel Girls & Boys Brands US, Fisher-Price Brands US, American Girl Brands and International, performs a detailed review of its inventory on an item by item basis and identifies which products are believed to be obsolete or slow-moving. Management assesses the need for, and the amount of, an obsolescence reserve based on the following factors:

• Customer and/or consumer demand for the item;

• Overall inventory positions of Mattel’s customers;

• Strength of competing products in the market;

• Quantity on hand of the item;

• Standard retail price of the item;

• Mattel’s cost for the item; and

• Length of time the item has been in inventory.

The time frame between when an estimate is made and the time of disposal depends on the above factors and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.

The following table summarizes Mattel’s obsolescence reserve at December 31 (in millions, except percentage information):

	2006			2005			2004
Allowance for obsolescence	$	43.3		$	60.5		$	65.2
As a percentage of total inventory		10.1	%		13.8	%		13.5	%

The decrease in the allowance for obsolescence from 2005 to 2006 was mainly due to 2006 efforts to liquidate excess inventory. The decrease from 2004 to 2005 in the allowance for obsolescence was mainly due to the utilization of reserves created for specifically-identified inventory in 2004. Management believes that its allowance for obsolescence at December 31, 2006 is adequate and proper. However, the impact resulting from the aforementioned factors could cause actual results to vary. Any incremental obsolescence charges would negatively affect the results of operations of one or more of Mattel’s business segments.

Valuation of Goodwill

Effective on January 1, 2002, Mattel adopted SFAS No. 142, which superseded Accounting Principles Board Opinion (“APB”) No. 17, Intangible Assets. This statement addresses the accounting and reporting of

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goodwill and other intangible assets subsequent to their acquisition. In accordance with the adoption of SFAS No. 142, Mattel ceased amortization of goodwill effective January 1, 2002.

Management believes that the accounting estimate related to the valuation of its goodwill is a “critical accounting estimate” because significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including net income and noncurrent assets, specifically goodwill. The valuation of goodwill involves a high degree of judgment since the first step of the impairment test required by SFAS No. 142 consists of a comparison of the fair value of a reporting unit with its book value. Based on the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. If the fair value is more than the book value of the reporting unit, an impairment loss is not recognized. If an impairment exists, the fair value of the reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.

SFAS No. 142 requires that goodwill be allocated to various reporting units, which are either at the operating segment level or one reporting level below the operating segment, for purposes of evaluating whether goodwill is impaired. Mattel’s reporting units for are: Mattel Girls Brands US, Mattel Boys Brands US (including newly acquired Radica), Fisher-Price Brands US, American Girl Brands and International. Goodwill is allocated to Mattel’s reporting units based on an allocation of brand-specific goodwill to the reporting units selling those brands. For each of the reporting units, the fair value of the reporting unit exceeded its carrying amount. As of September 30, 2006, Mattel performed the annual impairment test required by SFAS No. 142 and determined that its goodwill was not impaired. There were no events or circumstances that indicated the impairment test should be performed again at December 31, 2006.

Mattel utilizes the fair value of the cash flows that the business can be expected to generate in the future (Income Approach) to test for impairment. The Income Approach valuation method requires Mattel to make projections of revenue, operating costs and working capital investment for the reporting unit over a multi-year period. Additionally, management must make an estimate of its weighted average cost of capital to be used as a discount rate. Changes in these projections or estimates could result in a reporting unit either passing or failing the first step in the SFAS No. 142 impairment model, which could significantly change the amount of any impairment ultimately recorded.

Sales Adjustments

Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled $507.9 million, $444.5 million, and $443.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.

These programs primarily involve fixed amounts or percentages of sales to customers. Accruals for such programs are calculated based on an assessment of customers’ purchases and performance under the programs and any other specified factors. While the majority of sales adjustment amounts are readily determinable at period end and do not require estimates, certain of the sales adjustments require management to make estimates. In making these estimates, management considers all available information, including the overall business environment, historical trends and information from customers. Management believes that the accruals recorded for customer programs at December 31, 2006 are adequate and proper.

Benefit Plan Assumptions

As discussed in Note 4 to the consolidated financial statements, Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering substantially all employees of these companies. Mattel

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accounts for its defined benefit pension plans in accordance with SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, SFAS No. 87, Employers’ Accounting for Pensions, and its other postretirement benefit plans in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. See Item 8 “Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements.”

Actuarial valuations are used in determining amounts recognized in financial statements for retirement and other postretirement benefit plans. These valuations incorporate the following significant assumptions:

• Weighted average discount rate to be used to measure future plan obligations and interest cost component of plan income or expense;

• Rate of future compensation increases (for defined benefit pension plans);

• Expected long-term rate of return on plan assets (for funded plans); and

• Health care cost trend rates (for other postretirement benefit plans).

Management believes that these assumptions are “critical accounting estimates” because significant changes in these assumptions would ultimately impact Mattel’s results of operations and financial position. Management believes that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’ experience and advice received from its outside actuaries. Mattel reviews its benefit plan assumptions annually and modifies its assumptions based on current rates and trends as appropriate. The effects of such changes in assumptions are amortized as part of plan income or expense in future periods in accordance with SFAS Nos. 87 and 106.

At the end of each fiscal year, Mattel determines the weighted average discount rate used to calculate the projected benefit obligation. The discount rate is an estimate of the current interest rate at which the benefit plan liabilities could be effectively settled at the end of the year. The discount rate also impacts the interest cost component of plan income or expense. At December 31, 2006, Mattel determined the discount rate for its domestic benefit plans to be 5.7% as compared to 5.4% and 5.7% for the years ended 2005 and 2004, respectively. In estimating this rate, Mattel reviews rates of return on high quality, corporate bond indices, which approximate the timing and amount of benefit payments. Assuming all other benefit plan assumptions remain constant, the increase in the discount rate from 5.4% to 5.7% will result in a decrease in benefit plan expense during 2007 of approximately $1.2 million.

The rate of future compensation increases used by Mattel for the benefit obligation of its domestic defined benefit pension plans averaged 4.0% for 2006 and 4.4 % for 2005 and 2004, based on plan demographics. The rate of future compensation increases used by Mattel for the net periodic pension cost of its domestic defined benefit pension plans averaged 4.4 % for 2006, 2005 and 2004, based on plan demographics. These assumptions are reviewed annually based on historical salary increases for participants in the defined benefit pension plans. This assumption impacts the service and interest cost components of plan income or expense.

The long-term rate of return on plan assets is based on management’s expectation of earnings on the assets that secure Mattel’s funded defined benefit pension plans, taking into account the mix of invested assets, the arithmetic average of past returns, economic and stock market conditions and future expectations and the long-term nature of the projected benefit obligation to which these investments relate. The long-term rate of return is used to calculate the expected return on plan assets that is used in calculating pension income or expense. The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains or losses affects the calculated value of plan assets and, ultimately, future pension income or expense. Mattel’s long-term rate of return for its domestic defined benefit pension plans was 8.0% in 2006, 2005 and 2004. Assuming all other benefit plan assumptions remain constant, a one percentage point decrease in the expected return on plan assets would result in an increase in benefit plan expense of approximately $2.5 million.

The health care cost trend rates used by Mattel for its other postretirement benefit plans reflect management’s best estimate of expected claim costs over the next ten years. These trend rates impact the service

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and interest cost components of plan expense. Rates ranging from 9.0% in 2006 to 5.0% in 2010, with rates assumed to stabilize in 2010 and thereafter, were used in determining plan expense for 2006. These rates are reviewed annually and are estimated based on historical costs for participants in the other postretirement benefit plans as well as estimates based on current economic conditions. As of December 31, 2006, Mattel adjusted the health care cost trend rates for its other postretirement benefits plans to range from 9.0% in 2006 reducing to 5.0% in 2011, with rates assumed to stabilize in 2011 and thereafter. Assuming all other postretirement benefit plan assumptions remain constant, a one percentage point increase in the assumed health care cost trend rates would increase benefit plan expense during 2007 by approximately $0.6 million.

A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year would impact the postretirement benefit obligation as of December 31, 2006 by approximately $4.7 million and $(4.1) million, respectively, while a one percentage point increase/(decrease) would impact the service and interest cost recognized for 2006 by approximately $0.3 million and $(0.2) million, respectively.

Share-Based Payments

Prior to January 1, 2006, Mattel accounted for its employee stock compensation plans based on the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB Opinion No. 25, compensation expense is only recognized in the statements of operations for employee stock options with exercise prices below the measurement date market price of the company’s stock (see Item 8. “Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements”). The amount of additional compensation expense that would have resulted if Mattel had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, was included as a proforma disclosure in the financial statement footnotes.

Effective January 1, 2006, Mattel adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective transition method. Accordingly, results for prior periods have not been restated and compensation cost in 2006 includes the portion of share-based payment awards attributable to employee service during the period for (i) grants made prior to January 1, 2006, but not previously included in the proforma expense disclosures in Mattel’s financial statements, based on the measurement date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) grants made subsequent to January 1, 2006 based on the measurement date fair value estimated in accordance with the provisions of SFAS No. 123(R).

Beginning January 1, 2006 and in connection with the adoption of SFAS No. 123(R), Mattel recognizes the cost of all new employee share-based payment awards on a straight-line attribution basis over the requisite employee service period, net of estimated forfeitures; whereas, prior to January 1, 2006, Mattel used the graded vesting attribution method prescribed by Financial Accounting Standards Board (“FASB”) Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. In accounting for the income tax benefits associated with employee exercises of share-based payments, Mattel has elected to adopt the alternative simplified method as permitted by FSP No. FAS 123(R)-3, Accounting for the Tax Effects of Share-Based Payment Awards. FSP No. FAS 123(R)-3 permits the adoption of either the transition guidance described in SFAS No. 123(R) or the alternative simplified method specified in FSP No. FAS 123(R)-3 to account for the income tax effects of share-based payment awards. In determining when additional tax benefits associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions of the tax law, which allows deductions for share-based payment exercises to be utilized before previously existing net operating loss carryforwards. In computing dilutive shares under the treasury stock method, Mattel does not reduce the tax benefit amount within the calculation for the amount of deferred tax assets that would have been recognized had Mattel previously expensed all share-based payment awards.

Determining the fair value of share-based awards at the measurement date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. The fair value of options granted has been estimated using the Black-Scholes valuation

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model. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues. Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.

The following weighted average assumptions were used in determining fair value for options granted:

	2006			2005			2004
Expected life (in years)		5.1			4.9			6.3
Risk-free interest rate		4.9	%		4.1	%		4.0	%
Volatility factor		28.0	%		27.6	%		38.5	%
Dividend yield		2.8	%		2.4	%		1.2	%
Weighted average fair value per granted option	$	4.51		$	4.56		$	6.67

The following table summarizes the sensitivity of valuation assumptions within the calculation of stock option fair values, if all other assumptions are held constant:

	Increase in Assumption Factor		Increase (Decrease) in Fair Value (in % pts)
Expected life (in years)	1 year		7.1
Risk-free interest rate	1	%	7.1
Volatility factor	1	%	2.9
Dividend yield	1	%	(11.5	)
	(Decrease) in Assumption Factor		Increase (Decrease) in Fair Value (in % pts)
Expected life (in years)	(1	) year	(8.4	)
Risk-free interest rate	(1	)%	(6.9	)
Volatility factor	(1	)%	(2.7	)
Dividend yield	(1	)%	12.6

On December 28, 2005, the Compensation Committee of the Board of Directors of Mattel approved the acceleration of vesting of options for approximately 12.4 million shares with an exercise price of $16.09 or greater granted to employees other than Mattel’s Chairman and Chief Executive Officer. Vesting was not accelerated for stock options held by any member of the Board of Directors. The primary purpose of the accelerated vesting was to avoid recognizing future compensation expense associated with the accelerated stock options under SFAS No. 123(R). Additionally, for financial reporting purposes, there may be other potential tax benefits derived from accelerating the vesting of stock options. Due to the acceleration of vesting in 2005, future share-based payment grants are expected to impact Mattel’s consolidated statements of operations more significantly than in the current period. For those future grants, different valuation assumptions, or actual forfeitures differing significantly from estimated forfeitures, could have a material effect on Mattel’s future financial statements. Additionally, Mattel is evaluating the types of share-based payment awards it grants to employees and different types of share-based payment awards may be granted in the future.

In addition to a $19.3 million pre-tax charge during 2006 for prior period unintentional stock option accounting errors (see Item 8. “Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements”), Mattel recognized compensation expense of $4.6 million for stock options during the

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year ended December 31, 2006 as a component of other selling and administrative expenses. Prior to January 1, 2006, no compensation expense was recognized in the consolidated statements of operations for stock options. Compensation expense recognized related to grants of restricted stock and restricted stock units (“RSUs”) to certain employees and non-employee Board members was $3.6 million during the year ended December 31, 2006. As of December 31, 2006, total unrecognized compensation cost related to unvested share-based payments totaled $29.3 million and is expected to be recognized over a weighted-average period of 2.5 years.

Income Taxes

Mattel’s income tax provision and related income tax assets and liabilities are based on actual and expected future income, US and foreign statutory income tax rates, and tax regulations and planning opportunities in the various jurisdictions in which Mattel operates. Management believes that the accounting estimate related to income taxes is a “critical accounting estimate” because significant judgment is required in interpreting tax regulations in the US and in foreign jurisdictions, evaluating Mattel’s worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits. Actual results could differ materially from those judgments, and changes in judgments could materially affect Mattel’s consolidated financial statements.

Certain income and expense items are accounted for differently for financial reporting and income tax purposes. As a result, the tax expense reflected in Mattel’s consolidated statements of operations is different than that reported in Mattel’s tax returns filed with the taxing authorities. Some of these differences are permanent, such as expenses that are not deductible in Mattel’s tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred income tax assets and liabilities. Deferred income tax assets generally represent items that can be used as a tax deduction or credit in Mattel’s tax returns in future years for which Mattel has already recorded a tax benefit in its consolidated statement of operations. Mattel records a valuation allowance to reduce its deferred income tax assets if, based on the weight of available evidence, management believes expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least annually, and more frequently if actual operating results differ significantly from forecasted results.

Mattel accrues a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. Mattel applies a consistent methodology to estimate any additional tax liabilities based on management’s assessment of all relevant information, including prior audit experiences. The tax reserves are periodically reviewed and are adjusted as circumstances warrant and as events occur that affect Mattel’s liability for additional taxes, such as the lapsing of applicable statutes of limitations, conclusion of tax audits, identification of new issues, and any administrative guidance or administrative developments.

As of December 31, 2006, Mattel’s tax reserves totaled approximately $127 million, and related to potential income tax audit adjustments by US federal, state and foreign tax authorities primarily in areas such as transfer pricing and challenges to Mattel’s global intercompany pricing structure; challenges to tax credits claimed by local tax authorities; income tax nexus and apportionment issues for which local tax authorities may challenge Mattel’s nexus activities and apportionment among entities and jurisdictions; and issues identified in current income tax audits. Mattel will adopt FIN 48 as of January 1, 2007.

In 2006, Mattel recognized total income tax benefits of $63.0 million related to settlements of ongoing audits with foreign tax authorities and a settlement with a state tax authority for tax years 1997 and 1998. Of the $63.0 million of total income tax benefit recorded, $57.5 million represents refunds of previously paid taxes, recorded as an expense in previous years. These refunds were recorded as a reduction to income tax expense in the period the refunds were received by Mattel. The remainder of the tax benefit recorded in 2006 is a net reduction to total income tax reserves resulting from tax settlements with foreign and state tax authorities.

In 2005, Mattel reduced its total income tax reserves by $38.6 million as a result of tax benefits primarily relating to audit settlements reached with certain tax authorities in both the US and abroad. The ultimate

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settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s provision for income taxes, net income and deferred income tax assets and liabilities.

In the normal course of business, Mattel is regularly audited by federal, state and foreign tax authorities. Mattel is currently under audit by the IRS for the 2004 and 2005 tax years. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.

New Accounting Pronouncements

SFAS No. 156

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The standard permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. Under the amortization method, an entity amortizes servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date. Under the fair value measurement method, an entity measures servicing assets or servicing liabilities at fair value at each reporting date and reports changes in fair value in earnings in the period in which the changes occur. SFAS No. 156 is effective as of the beginning of the first fiscal year beginning after September 15, 2006. Mattel does not expect the adoption of SFAS No. 156 to have a material impact on its results of operations and financial position.

FIN 48

In July 2006, the FASB issued Final Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold an uncertain tax position is required to meet before tax benefits associated with such uncertain tax positions are recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the consolidated balance sheets prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings upon adoption of FIN 48. FIN 48 also requires that amounts recognized in the balance sheet related to uncertain tax positions be classified as a current or noncurrent liability, based upon the timing of the ultimate payment to a taxing authority. Mattel currently records tax reserves related to uncertain tax positions as a current liability and upon adoption of FIN 48, will reclassify to noncurrent liabilities those uncertain tax positions for which a cash tax payment is not expected within the next twelve months. Mattel will adopt FIN 48 as of January 1, 2007 and does not believe that the adoption of FIN 48 will have a material impact on results of operations.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability

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and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data. Fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Mattel does not expect the adoption of SFAS No. 157 to have a material impact on its results of operations and financial position.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for Mattel as of January 1, 2008. Mattel has not completed its evaluation of SFAS No. 159 but does not expect the adoption of SFAS No. 159 to have a material effect on its operating results or financial position.

Non-GAAP Financial Measure

In this Annual Report on Form 10-K, Mattel includes a non-GAAP financial measure, gross sales, which it uses to analyze its operations and to monitor, assess and identify meaningful trends in its operating and financial performance. Net sales, as reported in the consolidated statements of operations, include the impact of sales adjustments, such as trade discounts and other allowances. Gross sales represent sales to customers, excluding the impact of sales adjustments. Consistent with its segment reporting, Mattel presents changes in gross sales as a metric for comparing its aggregate, business unit, brand and geographic results to highlight significant trends in Mattel’s business. Changes in gross sales are discussed because, while Mattel records the detail of such sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with individual products.

A reconciliation of gross sales to the most directly comparable GAAP financial measure, net sales, is as follows (in thousands):

	For the Year
	2006			2005			2004
Revenues
Domestic:
Mattel Girls & Boys Brands US	$	1,507,493		$	1,364,922		$	1,511,550
Fisher-Price Brands US		1,471,604			1,358,562			1,319,200
American Girl Brands		439,970			436,085			379,112
Total Domestic		3,419,067			3,159,569			3,209,862
International		2,738,967			2,463,984			2,336,236
Gross sales		6,158,034			5,623,553			5,546,098
Sales adjustments		(507,878	)		(444,537	)		(443,312	)
Net sales	$	5,650,156		$	5,179,016		$	5,102,786

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Rate Risk

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Inventory purchase transactions denominated in the Euro, British pound sterling, Canadian dollar, Mexican peso, Hong

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Kong dollar and Indonesian rupiah were the primary transactions that caused currency transaction exposure for Mattel during 2006, 2005, and 2004. Mattel seeks to mitigate its exposure to market risk by monitoring its currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. For those intercompany receivables and payables that are not hedged, the transaction gains or losses are recorded in the consolidated statement of operations in the period in which the exchange rate changes as part of operating income or other non-operating (income), net based on the nature of the underlying transaction. Transaction gains or losses on intercompany inventory transactions are recorded in the consolidated statement of operations in the period in which the inventory is sold to customers. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes.

Mattel’s financial position is also impacted by currency exchange rate fluctuations on translation of its net investment in subsidiaries with non-US dollar functional currencies. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal year-end exchange rates. Income, expense and cash flow items are translated at weighted average exchange rates prevailing during the fiscal year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary currency translation exposures during 2006 were related to its net investment in entities having functional currencies denominated in the Euro, British pound sterling, Indonesian rupiah and Mexican peso.

Mattel’s foreign currency forward exchange contracts that were used to hedge firm foreign currency commitments as of December 31, 2006 are shown in the following table. All contracts are against the US dollar and are maintained by reporting units with a US dollar functional currency, with the exception of the Indonesian rupiah and Malaysian ringgit contracts that are maintained by entities with either a rupiah or ringgit functional currency.

	Buy					Sell
	Contract Amount		Weighted Average Contract Rate	Fair Value		Contract Amount		Weighted Average Contract Rate	Fair Value
	(In thousands of US dollars)
Euro*	$	368,678	1.31	$	371,170	$	342,441	1.30	$	349,284
Canadian dollar*		—	—		—		37,350	0.89		36,163
British pound sterling*		—	—		—		58,134	1.95		58,273
Japanese yen		3,261	117.69		3,229		6,923	119.09		6,924
Australian dollar*		17,208	0.78		17,353		27,480	0.76		28,199
Swiss franc		17,421	1.22		17,449		—	—		—
Mexican peso		58,997	10.89		59,581		12,614	11.00		12,641
Indonesian rupiah		45,245	9,438		46,799		—	—		—
New Zealand dollar*		6,307	0.70		6,345		1,889	0.67		1,963
Czech koruna		—	—		—		771	21.20		787
Taiwan dollar		—	—		—		9,305	32.74		9,369
Singapore dollar		—	—		—		1,690	1.54		1,701
Hungarian forint		—	—		—		699	194.67		717
Polish zloty		—	—		—		4,707	2.91		4,730
New Turkish lira		—	—		—		1,581	1.43		1,604
Malaysian ringgit		8,294	3.62		8,567		—	—		—
	$	525,411		$	530,493	$	505,584		$	512,355

* The weighted average contract rate for these contracts is quoted in US dollar per local currency.

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For the purchase of foreign currencies, fair value reflects the amount, based on dealer quotes, that Mattel would pay at maturity for contracts involving the same currencies and maturity dates, if they had been entered into as of December 31, 2006. For the sale of foreign currencies, fair value reflects the amount, based on dealer quotes, that Mattel would receive at maturity for contracts involving the same currencies and maturity dates, if they had been entered into as of December 31, 2006. The differences between the fair value and the contract amounts are expected to be fully offset by currency transaction gains and losses on the underlying hedged transactions.

In addition to the contracts involving the US dollar detailed in the above table, Mattel also had contracts to sell British pound sterling for the purchase of Euro. As of December 31, 2006, these contracts had a contract amount of $57.6 million and a fair value of $58.9 million.

Had Mattel not entered into hedges to limit the effect of currency exchange rate fluctuations on its results of operations and cash flows, its income before income taxes would have decreased by approximately $1 million in 2006 and $3 million in 2005, and increased by approximately $38 million in 2004.

Interest Rate Risk

In December 2005, Mattel, MAPS, Bank of America, N.A., and other financial institutions executed the MAPS facility which provides for (i) a term loan facility of $225.0 million consisting of a term loan advanced to MAPS in the original principal amount of $225.0 million, with $50.0 million of such amount to be repaid on each of December 15, 2006 and December 15, 2007, and the remaining aggregate principal amount of $125.0 million to be repaid on December 9, 2008, and (ii) a revolving loan facility consisting of revolving loans advanced to MAPS in the maximum aggregate principal amount at any time outstanding of $100.0 million, with a maturity date of December 9, 2008. Interest is charged at varying rates selected by Mattel based on Eurodollar rates or bank reference rates. On December 15, 2006, in addition to the required payment of $50.0 million, MAPS prepaid an incremental $125.0 million of the MAPS term loan facility. The remaining $50.0 million principal amount, consisting of $14.3 million due on December 15, 2007 and $35.7 million due on December 9, 2008, was prepaid on January 16, 2007. As of December 31, 2006, there was no balance outstanding on the MAPS revolving loan facility.

In June 2006, Mattel issued $100.0 million of unsecured Floating Rate Senior Notes due June 15, 2009. Interest on the Floating Rate Senior Notes is based on the three-month US Dollar LIBOR plus 40 basis points with interest payable quarterly beginning September 15, 2006.

In June 2006, Mattel entered into two interest rate swap agreements on the $100.0 million Floating Rate Senior Notes, each in a notional amount of $50.0 million, for the purpose of hedging the variability of cash flows in the interest payments due to fluctuations of the LIBOR benchmark interest rate. These cash flow hedges are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, whereby the hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in accumulated other comprehensive loss. Under the terms of the agreements, Mattel receives quarterly interest payments from the swap counterparties based on the three-month LIBOR plus 40 basis points and makes semi-annual interest payments to the swap counterparties based on a fixed rate of 5.87125%. The three-month LIBOR rate used to determine interest payments under the interest rate swap agreements resets every three months, matching the variable interest on the Floating Rate Senior Notes. The agreements expire in June 2009, which corresponds with the maturity of the Floating Rate Senior Notes.

Interest Rate Sensitivity

An assumed 50 basis point movement in interest rates on Mattel’s variable rate borrowings would have had an immaterial impact on its results of operations for the year ended December 31, 2006.

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Item 8.    Financial Statements and Supplementary Data.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Mattel’s management, including Robert A. Eckert, its principal executive officer, and Kevin M. Farr, its principal financial officer, evaluated the effectiveness of Mattel’s internal control over financial reporting using the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Mattel’s internal control over financial reporting was effective as of December 31, 2006. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited management’s assessment of the effectiveness of Mattel’s internal control over financial reporting as of December 31, 2006 as stated in their report which is included in this Annual Report on Form 10-K.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Mattel, Inc.

We have completed integrated audits of Mattel, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Mattel, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, during the year ended December 31, 2006, Mattel, Inc. changed the manner in which it accounts for stock compensation costs and the manner which it accounts for defined benefit pension and other postretirement plans.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Cont’d.)

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

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

PricewaterhouseCoopers LLP

Los Angeles, California

February 26, 2007

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MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2006			December 31, 2005
	(In thousands, except share data)
ASSETS
Current Assets
Cash and equivalents	$	1,205,552		$	997,734
Accounts receivable, less allowances of $19.4 million and $24.6 million in 2006 and 2005, respectively		943,813			760,643
Inventories		383,149			376,897
Prepaid expenses and other current assets		317,624			277,226
Total current assets		2,850,138			2,412,500
Property, plant and equipment, net		536,749			547,104
Goodwill		845,324			718,069
Other noncurrent assets		723,673			694,640
Total Assets	$	4,955,884		$	4,372,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings	$	—		$	117,994
Current portion of long-term debt		64,286			100,000
Accounts payable		375,882			265,936
Accrued liabilities		980,435			796,473
Income taxes payable		161,917			182,782
Total current liabilities		1,582,520			1,463,185
Noncurrent Liabilities
Long-term debt		635,714			525,000
Other		304,676			282,395
Total noncurrent liabilities		940,390			807,395
Commitments and Contingencies (See Note 9)
Stockholders’ Equity
Common stock $1.00 par value, 1.0 billion shares authorized; 441.4 million shares issued		441,369			441,369
Additional paid-in capital		1,613,307			1,589,281
Treasury stock at cost; 57.1 million shares and 52.8 million shares in 2006 and 2005, respectively		(996,981	)		(935,711	)
Retained earnings		1,652,140			1,309,822
Accumulated other comprehensive loss		(276,861	)		(303,028	)
Total stockholders’ equity		2,432,974			2,101,733
Total Liabilities and Stockholders’ Equity	$	4,955,884		$	4,372,313

The accompanying notes are an integral part of these statements.

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MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Year
	2006			2005			2004
	(In thousands, except per share amounts)
Net Sales	$	5,650,156		$	5,179,016		$	5,102,786
Cost of sales		3,038,363			2,806,148			2,692,061
Gross Profit		2,611,793			2,372,868			2,410,725
Advertising and promotion expenses		650,975			629,115			642,967
Other selling and administrative expenses		1,232,000			1,079,224			1,036,941
Operating Income		728,818			664,529			730,817
Interest expense		79,853			76,490			77,764
Interest (income)		(30,468	)		(34,211	)		(19,683	)
Other non-operating (income), net		(4,323	)		(29,799	)		(23,518	)
Income Before Income Taxes		683,756			652,049			696,254
Provision for income taxes		90,829			235,030			123,531
Net Income	$	592,927		$	417,019		$	572,723
Net Income Per Common Share—Basic	$	1.55		$	1.02		$	1.37
Weighted average number of common shares		382,921			407,402			419,235
Net Income Per Common Share—Diluted	$	1.53		$	1.01		$	1.35
Weighted average number of common and common equivalent shares		386,422			411,039			423,093
Dividends Declared Per Common Share	$	0.65		$	0.50		$	0.45

The accompanying notes are an integral part of these statements.

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MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Year
	2006			2005			2004
	(In thousands)
Cash Flows From Operating Activities:
Net income	$	592,927		$	417,019		$	572,723
Adjustments to reconcile net income to net cash flows from operating activities:
Gain on sale of investments		—			(32,831	)		(22,135	)
Net (gain) on sale of other property, plant and equipment		(10,984	)		(107	)		(2,717	)
Depreciation		166,328			170,772			176,729
Amortization		5,936			4,219			5,749
Deferred income taxes		(10,129	)		106,350			(18,560	)
Share-based compensation		27,546			197			235
Increase (decrease) from changes in assets and liabilities:
Accounts receivable, net		(103,882	)		(12,680	)		(170,203	)
Inventories		38,071			32,872			(18,578	)
Prepaid expenses and other current assets		(9,954	)		1,524			(17,452	)
Accounts payable, accrued liabilities and income taxes payable		180,361			(223,335	)		58,364
Other, net		(274	)		2,677			6,217
Net cash flows from operating activities		875,946			466,677			570,372
Cash Flows From Investing Activities:
Purchases of tools, dies and molds		(69,335	)		(74,690	)		(89,858	)
Purchases of other property, plant and equipment		(64,106	)		(62,441	)		(53,732	)
Proceeds from sale of investments		—			48,361			32,900
Payments for businesses acquired		(197,710	)		(1,495	)		(12,955	)
Proceeds from sale of other property, plant and equipment		16,367			8,074			15,588
Net cash flows used for investing activities		(314,784	)		(82,191	)		(108,057	)
Cash Flows From Financing Activities:
Proceeds from short-term borrowings		213,301			208,085			125,295
Payments of short-term borrowings		(332,285	)		(119,395	)		(119,025	)
Proceeds from long-term debt		298,356			225,000			—
Payments of long-term debt		(225,000	)		(189,130	)		(52,308	)
Purchase of treasury stock		(205,947	)		(487,127	)		(255,130	)
Payment of dividends on common stock		(249,542	)		(200,464	)		(186,864	)
Proceeds from exercise of stock options		116,901			28,426			21,683
Other, net		10,096			(2,712	)		—
Net cash flows used for financing activities		(374,120	)		(537,317	)		(466,349	)
Effect of Currency Exchange Rate Changes on Cash		20,776			(6,270	)		8,188
Increase (Decrease) in Cash and Equivalents		207,818			(159,101	)		4,154
Cash and Equivalents at Beginning of Year		997,734			1,156,835			1,152,681
Cash and Equivalents at End of Year	$	1,205,552		$	997,734		$	1,156,835
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes, gross	$	218,518		$	220,317		$	105,321
Interest		79,508			80,501			77,111
Non-cash investing and financing activities:
Liability for businesses acquired	$	—		$	—		$	1,024
Liability for equipment acquired		4,537			7,341			6,899
Asset write-downs		950			878			5,095

The accompanying notes are an integral part of these statements.

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MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	(In thousands)
Balance, December 31, 2003	$	441,212	$	1,599,278		$	(244,691	)	$	707,429		$	(287,007	)	$	2,216,221
Comprehensive income:
Net income										572,723						572,723
Change in net unrealized gain on securities													(16,359	)		(16,359	)
Change in net unrealized (loss) on derivative instruments													(1,412	)		(1,412	)
Minimum pension liability adjustments													(1,430	)		(1,430	)
Currency translation adjustments													36,380			36,380
Comprehensive income										572,723			17,179			589,902
Purchase of treasury stock							(255,130	)								(255,130	)
Issuance of treasury stock for stock option exercises				(6,409	)		26,472									20,063
Issuance of common stock for exercise of stock options		157		1,839												1,996
Tax impact of stock option exercises				(376	)											(376	)
Dividends declared										(186,864	)					(186,864	)
Balance, December 31, 2004		441,369		1,594,332			(473,349	)		1,093,288			(269,828	)		2,385,812
Comprehensive income:
Net income										417,019						417,019
Change in net unrealized gain on securities													(16,442	)		(16,442	)
Change in net unrealized (loss) on derivative instruments													29,252			29,252
Minimum pension liability adjustments													(7,243	)		(7,243	)
Currency translation adjustments													(38,767	)		(38,767	)
Comprehensive income										417,019			(33,200	)		383,819
Purchase of treasury stock							(500,375	)								(500,375	)
Issuance of treasury stock for stock option exercises				(9,448	)		37,874									28,426
Other issuance of treasury stock				2			48									50
Restricted stock and restricted stock units				106			91									197
Tax impact of stock option exercises				4,268												4,268
Dividends declared				21						(200,485	)					(200,464	)
Balance, December 31, 2005		441,369		1,589,281			(935,711	)		1,309,822			(303,028	)		2,101,733
Comprehensive income:
Net income										592,927						592,927
Change in net unrealized (loss) on derivative instruments													(10,787	)		(10,787	)
Minimum pension liability adjustments													21,465			21,465
Currency translation adjustments													69,632			69,632
Comprehensive income										592,927			80,310			673,237
Purchase of treasury stock							(192,749	)								(192,749	)
Issuance of treasury stock for stock option exercises				(12,049	)		131,423									119,374
Other issuance of treasury stock				(5	)		55									50
Share-based compensation				27,546												27,546
Tax impact of stock option exercises				8,522												8,522
Dividend equivalents for restricted stock units				12			1			(1,067	)					(1,054	)
Dividends declared										(249,542	)					(249,542	)
Adjustment for initial adoption of SFAS No.158													(54,143	)		(54,143	)
Balance, December 31, 2006	$	441,369	$	1,613,307		$	(996,981	)	$	1,652,140		$	(276,861	)	$	2,432,974

The accompanying notes are an integral part of these statements.

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MATTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Preparation

The consolidated financial statements include the accounts of Mattel, Inc. and its subsidiaries (“Mattel”). All majority-owned subsidiaries are consolidated and included in Mattel’s consolidated financial statements. Investments in joint ventures and other companies are accounted for by the equity method or cost basis, depending upon the level of the investment and/or Mattel’s ability to exercise influence over operating and financial policies. Mattel does not have any minority stock ownership interests in which it has a controlling financial interest that would require consolidation. All significant intercompany accounts and transactions have been eliminated in consolidation, and certain amounts in the consolidated financial statements for prior years have been reclassified to conform to the current year presentation.

Use of Estimates

Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could ultimately differ from those estimates.

Foreign Currency Translation Exposure

Mattel’s reporting currency is the US dollar. The translation of its net investment in subsidiaries with non-US dollar functional currencies subjects Mattel to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal year-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary currency translation exposures are related to its net investment in entities having functional currencies denominated in the Euro, British pound sterling, Indonesian rupiah and Mexican peso.

Cash and Equivalents

Cash and equivalents includes short-term investments, which are highly liquid investments with maturities of three months or less when purchased. Such investments are stated at cost, which approximates market value.

Marketable Securities

Marketable securities are comprised of investments in publicly traded securities, classified as available-for-sale, and are recorded at market value with unrealized gains or losses, net of tax, reported as a component of accumulated other comprehensive loss within stockholders’ equity until realized. Gains or losses on the sale of marketable securities are calculated using the specific identification method. Mattel held no marketable securities at December 31, 2006 and 2005.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on extensive evaluations made on an ongoing basis throughout the fiscal year of the financial performance, cash generation, financing availability and liquidity status of each customer. Customers are reviewed at least annually,

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with more frequent reviews being performed if necessary, based on the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses before shipping to those customers on credit. Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring or purchasing various forms of credit insurance with unrelated third parties or requiring cash in advance of shipment.

Mattel records an allowance for doubtful accounts based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging and customer disputes. When circumstances arise or a significant event occurs that comes to the attention of management, such as a bankruptcy filing of a customer, the allowance is reviewed for adequacy and adjusted to reflect the change in the estimated amount to be received from the customer.

Inventories

Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of 10 to 40 years for buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, not to exceed the lease term, for leasehold improvements. Tools, dies and molds are amortized using the straight-line method over 3 years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of fixed assets is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Any impairment identified is assessed by evaluating the operating performance and future undiscounted cash flows of the underlying assets. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is included in the results of operations.

Goodwill

Goodwill is allocated to various reporting units, which are either at the operating segment level or one reporting level below the operating segment for purposes of evaluating whether goodwill is impaired. Mattel’s reporting units are: Mattel Girls Brands US, Mattel Boys Brands US, Fisher-Price Brands US, American Girl Brands and International. Mattel tests goodwill for impairment annually in the third quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, which is based on the fair value of the cash flows that the reporting units can be expected to generate in the future.

Foreign Currency Transaction Exposure

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income in the consolidated statement of operations. Gains and losses on unhedged intercompany loans and advances are recorded as a component of other non-operating (income), net in the consolidated statements of operations in the period in which the currency exchange rate changes. Inventory purchase transactions denominated in the Euro, British pound sterling, Canadian dollar, Mexican peso, Hong Kong dollar and Indonesian rupiah are the primary transactions that cause foreign currency transaction exposure for Mattel.

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Derivative Instruments

Mattel uses foreign currency forward exchange and option contracts as cash flow hedges primarily to hedge its purchases and sales of inventory denominated in foreign currencies. Additionally, Mattel uses fair value hedges to hedge intercompany loans and advances denominated in foreign currencies.

At the inception of the contracts, Mattel designates its derivatives as either cash flow or fair value hedges and documents the relationship of the hedge to the underlying transaction, for cash flow hedges, or the recognized asset or liability, for fair value hedges. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge qualifies for hedge accounting treatment. Changes in fair value associated with hedge ineffectiveness, if any, are recorded in the results of operations.

Changes in fair value of Mattel’s cash flow derivatives are deferred and recorded as part of accumulated other comprehensive loss in stockholders’ equity until the underlying transaction is settled. Upon settlement, any gain or loss resulting from the derivative is recorded in the results of operations. Transaction gains or losses on hedged intercompany inventory transactions are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. In the event that an anticipated transaction is no longer likely to occur, Mattel recognizes the change in fair value of the derivative in its results of operations in the period the determination is made.

Mattel uses fair value derivatives to hedge most intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these contracts. Changes in fair value of these derivatives were not significant to the results of operations during any year.

Revenue Recognition and Sales Adjustments

Revenue is recognized upon shipment or upon receipt of products by the customer, depending on terms, provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured. Management assesses the business environment, the customer’s financial condition, historical collection experience, accounts receivable aging and customer disputes to determine whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sale, Mattel does not recognize revenue until collection occurs. Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross revenue in the period the related revenue is recognized.

Advertising and Promotion Costs

Costs of media advertising are expensed the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of catalog production and mailing costs that are generally amortized within three months from the date the catalogs are mailed.

Product Recalls

Mattel establishes a reserve for product recalls on a product-specific basis during the period in which the circumstances giving rise to the recall become known. Facts underlying the recall, including where the product affected by the recall is located (e.g., with consumers, in customers’ inventory, or in Mattel’s inventory), whether

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the product is repairable, cost estimates for communicating the recall to consumers and customers, and cost estimates for parts and labor if the recalled product is deemed to be repairable, are considered when establishing a product recall reserve. When facts or circumstances become known that would indicate that the recall reserve is either not sufficient to cover or exceeds the estimated product recall expenses, the reserve is adjusted, as appropriate.

Research and Development Costs

Research and development costs are charged to the results of operations as incurred.

Employee Benefit Plans

Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering substantially all employees of these companies. Mattel accounts for its defined benefit pension plans in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, SFAS No. 87, Employers’ Accounting for Pensions, and its other postretirement benefit plans in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. Actuarial valuations are used in determining amounts recognized in financial statements for retirement and other postretirement benefit plans (see “Note 4 to the Consolidated Financial Statements”).

Share-Based Payments

Prior to January 1, 2006, Mattel accounted for its employee stock compensation plans based on the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB Opinion No. 25, compensation expense is only recognized in the statements of operations for employee stock options with exercise prices below the measurement date market price of the company’s stock (see “Note 7 to the Consolidated Financial Statements”). The amount of additional compensation expense that would have resulted if Mattel had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, was included as a proforma disclosure in the financial statement footnotes.

Effective January 1, 2006, Mattel adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective transition method. Accordingly, results for prior periods have not been restated and compensation cost in 2006 includes the portion of share-based payment awards attributable to employee service during the period for (i) grants made prior to January 1, 2006, but not previously included in the proforma expense disclosures in Mattel’s financial statements, based on the measurement date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) grants made subsequent to January 1, 2006 based on the measurement date fair value estimated in accordance with the provisions of SFAS No. 123(R).

Beginning January 1, 2006 and in connection with the adoption of SFAS No. 123(R), Mattel recognizes the cost of all new employee share-based payment awards on a straight-line attribution basis over the requisite employee service period, net of estimated forfeitures; whereas, prior to January 1, 2006, Mattel used the graded vesting attribution method prescribed by Financial Accounting Standards Board (“FASB”) Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. In accounting for the income tax benefits associated with employee exercises of share-based payments, Mattel has elected to adopt the alternative simplified method as permitted by FASB Staff Position (“FSP”) No. FAS 123(R)-3, Accounting for the Tax Effects of Share-Based Payment Awards. FSP No. FAS 123(R)-3 permits the adoption of either the transition guidance described in SFAS No. 123(R) or the alternative simplified method specified in FSP No. FAS 123(R)-3 to account for the income tax effects of share-based payment awards. In determining when additional tax benefits associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions of the tax law, which allows deductions for share-based payment exercises to be utilized

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before previously existing net operating loss carryforwards. In computing dilutive shares under the treasury stock method, Mattel does not reduce the tax benefit amount within the calculation for the amount of deferred tax assets that would have been recognized had Mattel previously expensed all share-based payment awards.

Determining the fair value of share-based awards at the measurement date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. The fair value of options granted has been estimated using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues. Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.

The following weighted average assumptions were used in determining fair value for options granted:

	2006			2005			2004
Expected life (in years)		5.1			4.9			6.3
Risk-free interest rate		4.9	%		4.1	%		4.0	%
Volatility factor		28.0	%		27.6	%		38.5	%
Dividend yield		2.8	%		2.4	%		1.2	%
Weighted average fair value per granted option	$	4.51		$	4.56		$	6.67

On December 28, 2005, the Compensation Committee of the Board of Directors of Mattel approved the acceleration of vesting of all outstanding unvested stock options with an exercise price of $16.09 or greater granted to employees other than Robert A. Eckert, Mattel’s Chairman and Chief Executive Officer, under the Amended and Restated Mattel 1996 Stock Option Plan, the Amended and Restated Mattel 1999 Stock Option Plan and the Mattel, Inc. 2005 Equity Compensation Plan (collectively, the “Stock Option Plans”). Options held by non-employee members of the Board of Directors were also excluded from the acceleration. The effective date of the acceleration was December 28, 2005; on such date, the closing price of Mattel’s common stock on the New York Stock Exchange was $15.95 per share. The options as to which vesting was accelerated have exercise prices per share ranging from $16.09 to $22.52, and a weighted average exercise price per share of $18.34. As a result of the acceleration, options for approximately 12.4 million shares became immediately exercisable. Typically, stock options granted to employees under the Stock Option Plans vest over a three-year period. The number of shares subject to, and exercise prices of, the options as to which vesting was accelerated remain unchanged.

With regard to the accelerated options held by Mattel’s executive officers who report directly to Mr. Eckert, Mattel imposed a restriction consisting of a holding period on shares underlying the portion of such options as to which vesting was accelerated. Pursuant to this restriction, each such executive officer is required to refrain from selling any shares acquired upon exercise of any portion of such options that was accelerated, until the earlier of (a) the date on which the portion of the option being exercised by such executive officer would have become vested pursuant to the option’s original vesting schedule, or (b) the date on which such executive officer ceases to be an executive officer of Mattel. The primary purpose of the accelerated vesting was to avoid recognizing future compensation expense associated with the accelerated stock options under the adoption of SFAS No. 123(R), Share-Based Payment, by Mattel in 2006. Additionally, for financial reporting purposes, there were other potential tax benefits derived from accelerating the vesting of outstanding stock options prior to the adoption of SFAS No. 123(R).

In addition to a $19.3 million pre-tax charge during 2006 for prior period unintentional stock option accounting errors (see “Note 7 to the Consolidated Financial Statements”), Mattel recognized compensation expense of $4.6 million for stock options during the year ended December 31, 2006 as a component of other

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selling and administrative expenses. Prior to January 1, 2006, no compensation expense was recognized in the consolidated statements of operations for stock options.

Compensation expense recognized related to grants of restricted stock and restricted stock units (“RSUs”) to certain employees and non-employee Board members was $3.6 million for the year ended December 31, 2006. As of December 31, 2006, total unrecognized compensation cost related to unvested share-based payments totaled $29.3 million and is expected to be recognized over a weighted-average period of 2.5 years.

Income Taxes

Certain income and expense items are accounted for differently for financial reporting and income tax purposes. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, applying enacted statutory income tax rates in effect for the year in which the differences are expected to reverse.

Net Income Per Common Share

Basic net income per common share is computed by dividing reported net income by the weighted average number of common shares, outstanding during each period.

Diluted net income per common share is computed by dividing reported net income by the weighted average number of common shares and other common equivalent shares outstanding during each period. The calculation of common equivalent shares assumes the exercise of dilutive stock options and warrants, net of assumed treasury share repurchases at average market prices, as applicable. Nonqualified stock options totaling 22.0 million, 27.6 million and 25.3 million were excluded from the calculation of diluted net income per common share for 2006, 2005, and 2004, respectively, because they were anti-dilutive.

A reconciliation of weighted average shares for the years ended December 31 is as follows (in thousands):

	2006	2005	2004
Common shares	382,921	407,402	419,235
Effect of dilutive securities:
Stock options and restricted stock	3,501	3,637	3,858
Common and common equivalent shares	386,422	411,039	423,093

New Accounting Pronouncements

SFAS No. 156

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The standard permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. Under the amortization method, an entity amortizes servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date. Under the fair value measurement method, an entity measures servicing assets or servicing liabilities at fair value at each reporting date and reports changes in fair value in earnings in the period in which the changes occur. SFAS No. 156 is effective as of the beginning of the first fiscal year beginning after September 15, 2006. Mattel does not expect the adoption of SFAS No. 156 to have a material impact on its results of operations and financial position.

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FIN 48

In July 2006, the FASB issued Final Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold an uncertain tax position is required to meet before tax benefits associated with such uncertain tax positions are recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the consolidated balance sheets prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings upon adoption of FIN 48. FIN 48 also requires that amounts recognized in the balance sheet related to uncertain tax positions be classified as a current or noncurrent liability, based upon the timing of the ultimate payment to a taxing authority. Mattel currently records tax reserves related to uncertain tax positions as a current liability and upon adoption of FIN 48, will reclassify to noncurrent liabilities those uncertain tax positions for which a cash tax payment is not expected within the next twelve months. Mattel will adopt FIN 48 as of January 1, 2007 and does not believe that the adoption of FIN 48 will have a material impact on its results of operations

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data. Fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Mattel does not expect the adoption of SFAS No. 157 to have a material impact on its results of operations and financial position.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for Mattel as of January 1, 2008. Mattel has not completed its evaluation of SFAS No. 159 but does not expect the adoption of SFAS No. 159 to have a material effect on its operating results or financial position.

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Note 2—Goodwill

The change in the carrying amount of goodwill by reporting unit for the years ended 2006 and 2005 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the US reporting units selling those brands, thereby causing foreign currency translation impact to the US reporting units.

	Mattel Girls Brands US Division			Mattel Boys Brands US Division			Fisher-Price Brands US			American Girl Brands		International			Total
	(In thousands)
Balance at December 31, 2004	$	37,566		$	54,411		$	217,152		$	207,571	$	218,980		$	735,680
Impact of currency exchange rate changes		(3,563	)		(277	)		(697	)		—		(13,074	)		(17,611	)
Balance at December 31, 2005		34,003			54,134			216,455			207,571		205,906			718,069
Radica acquisition (see Note 12)		—			71,726			—			—		35,858			107,584
Impact of currency exchange rate changes		4,275			333			836			—		14,227			19,671
Balance at December 31, 2006	$	38,278		$	126,193		$	217,291		$	207,571	$	255,991		$	845,324

In 2006, Mattel performed the annual impairment test required by SFAS No. 142 and determined that its goodwill was not impaired.

Note 3—Income Taxes

Consolidated pre-tax income consists of the following (in thousands):

	For the Year
	2006		2005		2004
US operations	$	33,985	$	27,990	$	89,934
Foreign operations		649,771		624,059		606,320
	$	683,756	$	652,049	$	696,254

The provision for current and deferred income taxes consists of the following (in thousands):

	For the Year
	2006			2005		2004
Current
Federal	$	25,483		$	20,844	$	(8,456	)
State		(5,294	)		5,989		7,950
Foreign		80,769			101,847		142,597
		100,958			128,680		142,091
Deferred
Federal		4,635			82,816		16,387
State		(2,185	)		11,410		2,550
Foreign		(12,579	)		12,124		(37,497	)
		(10,129	)		106,350		(18,560	)
Provision for income taxes	$	90,829		$	235,030	$	123,531

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Deferred income taxes are provided principally for tax credit carryforwards, net operating loss carryforwards, research and development expenses, depreciation, employee compensation-related expenses and certain other reserves that are recognized in different years for financial reporting and income tax reporting purposes. Mattel’s deferred income tax assets (liabilities) are comprised of the following (in thousands):

	December 31,
	2006			2005
Tax credit carryforwards	$	228,085		$	219,218
Research and development expenses		184,508			172,852
Loss carryforwards		133,752			177,316
Allowances and reserves		95,189			89,161
Intangible assets		29,714			54,780
Deferred compensation		68,097			45,310
Other		64,007			46,058
Gross deferred income tax assets		803,352			804,695
Intangible assets		(36,382	)		(35,884	)
Other		(15,820	)		(33,056	)
Gross deferred income tax liabilities		(52,202	)		(68,940	)
Deferred income tax asset valuation allowances		(185,459	)		(201,809	)
Net deferred income tax assets	$	565,691		$	533,946

Net deferred income tax assets are reported in the consolidated balance sheets as follows (in thousands):

	December 31,
	2006			2005
Prepaid expenses and other current assets	$	72,406		$	58,390
Other noncurrent assets		503,168			495,914
Current liabilities		(1,148	)		(1,396	)
Other noncurrent liabilities		(8,735	)		(18,962	)
	$	565,691		$	533,946

As of December 31, 2006, Mattel has federal and foreign loss carryforwards totaling $359.1 million and tax credit carryforwards of $228.1 million. Utilization of these loss and tax credit carryforwards is subject to annual limitations. Mattel’s loss and tax credit carryforwards expire in the following periods (in millions):

	Loss Carryforwards		Tax Credit Carryforwards
2007 – 2011	$	56.6	$	129.9
Thereafter		106.7		88.7
No expiration date		195.8		9.5
Total	$	359.1	$	228.1

Management considered all available evidence and determined that a valuation allowance of $185.5 million was required as of December 31, 2006 for those loss and tax credit carryforwards that are not expected to provide future tax benefits. Of the total valuation allowance of $185.5 million, $4.9 million relates to items whereby the realization, if any, would result in a credit to goodwill rather than income tax expense. Changes in the valuation allowance for 2006 include increases in the valuation allowance for 2006 foreign losses without benefits, including losses of Radica Games Limited (“Radica”), acquired by Mattel in 2006, and a decrease in the

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valuation allowance for loss carryforwards which expired and were written off. Management believes it is more likely than not that Mattel will generate sufficient taxable income in the appropriate carryforward periods to realize the benefit of the remaining net deferred income tax assets of $565.7 million.

Differences between the provision for income taxes at the US federal statutory income tax rate and the provision in the consolidated statements of operations are as follows (in thousands):

	For the Year
	2006			2005			2004
Provision at US federal statutory rates	$	239,315		$	228,217		$	243,689
Increase (decrease) resulting from:
Foreign earnings taxed at different rates, including withholding taxes		(104,846	)		(70,942	)		(68,175	)
Foreign losses without income tax benefit		15,738			10,110			7,730
State and local taxes, net of US federal benefit		1,314			583			6,825
Repatriation of foreign earnings under the Jobs Act, including state taxes		—			107,010			—
Adjustments to previously accrued taxes		(63,016	)		(38,572	)		(65,100	)
Other		2,324			(1,376	)		(1,438	)
Provision for income taxes	$	90,829		$	235,030		$	123,531

On May 17, 2006, the Tax Increase Prevention and Reconciliation Act (the “Tax Act”) was signed into law. As a result of the certain provisions of the Tax Act, Mattel’s 2006 income tax provision was positively impacted by approximately $37 million. These provisions of the Tax Act impacting Mattel’s 2006 income tax provision are set to expire on December 31, 2008. On October 22, 2004, the American Jobs Creation Act (the “Jobs Act”) was signed into law. Among its various provisions, the Jobs Act creates a temporary incentive for US corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. Mattel repatriated $2.4 billion in foreign earnings during 2005, resulting in an increase to Mattel’s 2005 income tax provision of $107.0 million.

The cumulative amount of undistributed earnings of foreign subsidiaries that Mattel intends to permanently invest and upon which no deferred US income taxes have been provided is $1.8 billion as of December 31, 2006. The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in whole or in part by foreign tax credits. The extent of this offset would depend on many factors, including the method of distribution, and specific earnings distributed.

Mattel accrues a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. Mattel applies a consistent methodology to estimate any additional tax liabilities based on management’s assessment of all relevant information, including prior audit experiences. The tax reserves are periodically reviewed and are adjusted as circumstances warrant and as events occur that affect Mattel’s liability for additional taxes, such as the lapsing of applicable statutes of limitations, conclusion of tax audits, identification of new issues, and any administrative guidance or administrative developments.

As of December 31, 2006, Mattel’s tax reserves totaled approximately $127 million, and related to potential income tax audit adjustments by US federal, state and foreign tax authorities primarily in areas such as transfer pricing and challenges to Mattel’s global intercompany pricing structure; challenges to tax credits claimed by local tax authorities; income tax nexus and apportionment issues for which local tax authorities may challenge Mattel’s nexus activities and apportionment among entities and jurisdictions; and issues identified in current income tax audits. Mattel will adopt FIN 48 as of January 1, 2007.

In 2006, Mattel recognized total income tax benefits of $63.0 million related to settlements with taxing authorities, including $56.8 million as a result of settlements with foreign tax authorities and $6.2 million due to

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a settlement with a state tax authority for tax years 1997 and 1998. Of the $63.0 million of total income tax benefits recorded, $57.5 million represents refunds of previously paid taxes, recorded as an expense in previous years. These refunds were recorded as a reduction to income tax expense in the period the refunds were received by Mattel. The remainder of the tax benefit recorded in 2006 is a net reduction to total income tax reserves resulting from tax settlements with foreign and state tax authorities.

In 2005, Mattel reduced its total income tax reserves by $38.6 million as a result of tax settlements reached with various tax authorities and reassessments of tax exposures based on the status of current audits in various jurisdictions around the world. In 2004, Mattel reached a settlement with the Internal Revenue Service (“IRS”) regarding the examination of Mattel’s US federal income tax returns for the years 1998 through 2001. The settlement resulted in a net benefit of $65.1 million from changes in tax estimates, and the benefit is reflected in the 2004 provision for income taxes in the consolidated statement of operations. During 2005, the IRS completed its examination of the Mattel, Inc. US federal income tax returns for 2002 and 2003.

In the normal course of business, Mattel is regularly audited by federal, state and foreign tax authorities. Mattel is currently under audit by the IRS for the 2004 and 2005 tax years. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.

Accounting principles generally accepted in the United States of America require that tax benefits related to the exercise of nonqualified stock options and stock warrants be credited to additional paid-in-capital. The exercise of nonqualified stock options resulted in an increase in additional paid-in-capital for related income tax benefits totaling $8.5 million in 2006, and an increase in additional paid-in-capital totaling $4.3 million in 2005.

Note 4—Employee Benefit Plans

Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies. These plans include defined benefit pension plans, defined contribution retirement plans, postretirement benefit plans, and deferred compensation and excess benefit plans. In addition, Mattel makes contributions to government-mandated retirement plans in countries outside the US where its employees work.

A summary of retirement plan expense is as follows (in millions):

	For the Year
	2006		2005		2004
Defined benefit pension plans	$	21.7	$	22.2	$	15.2
Defined contribution retirement plans		29.7		29.6		27.8
Postretirement benefit plans		3.7		4.9		5.0
Deferred compensation and excess benefit plans		4.5		3.2		3.1
Government-mandated plans outside the US		0.6		0.3		0.9
	$	60.2	$	60.2	$	52.0

Defined Benefit Pension and Postretirement Benefit Plans

Mattel provides defined benefit pension plans for eligible domestic employees, which satisfy the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Some of Mattel’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible employees. Mattel funds these plans in accordance with the terms of the plans and local statutory requirements, which differ for each of the countries in which the subsidiaries are located. Mattel also has unfunded postretirement health insurance plans covering certain eligible domestic employees.

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Adoption of SFAS No. 158

In the fourth quarter of 2006, Mattel adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires an entity to (i) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (ii) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and (iii) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS No. 158 does not change the amount of net periodic benefit cost included in net income or address the various measurement requirements associated with postretirement benefit plan accounting. The requirement to measure plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position is consistent with Mattel’s current accounting treatment. Retrospective application of SFAS No. 158 is not permitted and accordingly, results for the prior periods have not been restated.

The impact of adopting SFAS No. 158 on the December 31, 2006 consolidated balance sheet is as follows (in thousands):

	Before Adoption of SFAS No. 158			Adjustments			After Adoption of SFAS No. 158
Other noncurrent assets (a)	$	697,029		$	26,644		$	723,673
Total assets		4,929,240			26,644			4,955,884
Other noncurrent liabilities (b)		223,889			80,787			304,676
Total noncurrent liabilities		859,603			80,787			940,390
Accumulated other comprehensive (loss), net of tax (c)		(222,718	)		(54,143	)		(276,861	)
Total stockholders’ equity		2,487,117			(54,143	)		2,432,974

(a) Intangible assets and deferred tax assets totaled $0 and $60,353, respectively, after the adoption of SFAS No. 158.

(b) Noncurrent accrued benefit liability totaled $176,584 after the adoption of SFAS No. 158.

(c) Accumulated other comprehensive (loss) for pension benefits totaled $(101,393) after the adoption of SFAS No. 158.

A summary of the components of Mattel’s net benefit cost for the years ended December 31 is as follows (in thousands):

	Defined Benefit Pension Plans									Postretirement Benefit Plans
	2006			2005			2004			2006		2005		2004
Service cost	$	12,110		$	10,016		$	7,998		$	106	$	119	$	121
Interest cost		24,234			23,117			21,584			2,690		3,245		3,404
Expected return on plan assets		(25,804	)		(23,889	)		(22,146	)		—		—		—
Amortization of prior service cost		1,933			1,920			(599	)		—		—		—
Recognized actuarial loss		9,205			10,993			7,877			918		1,507		1,498
Net periodic benefit cost		21,678			22,157			14,714			3,714		4,871		5,023
Special termination benefits		—			—			519			—		—		—
Net benefit cost	$	21,678		$	22,157		$	15,233		$	3,714	$	4,871	$	5,023

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Net periodic benefit cost for Mattel’s domestic defined benefit pension and postretirement benefit plans was calculated on January 1 of each year using the following assumptions:

	For the Year
	2006		2005		2004
Defined benefit pension plans:
Discount rate	5.4	%	5.7	%	6.0	%
Weighted average rate of future compensation increases	4.4	%	4.4	%	4.4	%
Long-term rate of return on plan assets	8.0	%	8.0	%	8.0	%
Postretirement benefit plans:
Discount rate	5.4	%	5.7	%	6.0	%
Annual increase in Medicare Part B premium	6.0	%	6.0	%	4.0	%
Health care cost trend rate:
Pre-65	9.0	%	10.0	%	8.0	%
Post-65	10.0	%	11.0	%	9.0	%
Ultimate cost trend rate (pre- and post-65)	5.0	%	5.0	%	5.5	%
Year that the rate reaches the ultimate cost trend rate:
Pre-65	2010		2010		2007
Post-65	2011		2011		2007

Discount rates, weighted average rates of future compensation increases, and long-term rates of return on plan assets for Mattel’s foreign defined benefit pension plans differ from the assumptions used for Mattel’s domestic defined benefit pension plans due to differences in local economic conditions in which the non-US plans are based. The rates shown in the preceding table are indicative of the weighted average rates of all Mattel’s defined benefit pension plans given the relative insignificance of the foreign plans to the consolidated total.

The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $9.9 million. The estimated net loss for the other defined benefit postretirement plans that will be amortized from accumulated other comprehensive loss into net period benefit cost over the next fiscal year is $0.8 million.

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A summary of the changes in benefit obligation and plans assets is as follows (in thousands):

	Defined Benefit Pension Plans						Postretirement Benefit Plans
	2006			2005			2006			2005
Change in Benefit Obligation
Benefit obligation, beginning of year	$	466,453		$	418,410		$	59,938		$	58,564
Service cost		12,110			10,016			106			119
Interest cost		24,234			23,117			2,690			3,245
Participant contributions		56			54			—			—
Plan amendments		423			16,820			—			—
Impact of currency exchange rate changes		12,093			(10,551	)		—			—
Actuarial loss (gain)		(28,743	)		29,158			(9,625	)		1,732
Benefits paid		(24,240	)		(20,571	)		(3,063	)		(3,722	)
Benefit obligation, end of year	$	462,386		$	466,453		$	50,046		$	59,938
Change in Plan Assets
Plan assets at fair value, beginning of year	$	296,564		$	287,667		$	—		$	—
Actual return on plan assets		31,979			21,176			—			—
Employer contributions		14,212			13,266			3,063			3,722
Participant contributions		56			54			—			—
Impact of currency exchange rate changes		7,192			(5,028	)		—			—
Benefits paid		(24,240	)		(20,571	)		(3,063	)		(3,722	)
Plan assets at fair value, end of year	$	325,763		$	296,564		$	—		$	—
Net Amount Recognized in Consolidated Balance Sheets
Funded status, end of year	$	(136,623	)	$	(169,889	)	$	(50,046	)	$	(59,938	)
Unrecognized actuarial loss		N/A			178,215			N/A			23,970
Unrecognized prior service cost		N/A			17,161			N/A			—
Net amount recognized		N/A		$	25,487			N/A		$	(35,968	)
Intangible asset		N/A		$	17,161			N/A		$	—
Accrued benefit liability		N/A			(99,403	)		N/A			(35,968	)
Accumulated other comprehensive loss (a)		N/A			107,729			N/A			—
Net amount recognized		N/A		$	25,487			N/A		$	(35,968	)
Current accrued benefit liability		(6,454	)		N/A			(3,631	)		N/A
Noncurrent accrued benefit liability		(130,169	)		N/A			(46,415	)		N/A
Total accrued benefit liability	$	(136,623	)		N/A		$	(50,046	)		N/A
Amounts recognized in Accumulated Other Comprehensive Loss (a)
Net loss	$	137,864		$	107,729		$	13,427		$	—
Prior service cost		10,455			—			—			—
	$	148,319		$	107,729		$	13,427		$	—

(a) Amounts exclude related tax benefits of $60.4 million and $39.0 million for December 31, 2006 and 2005, respectively, which are also included in accumulated other comprehensive loss.

The accumulated benefit obligation differs from the projected benefit obligation in that it assumes future compensation levels will remain unchanged. Mattel’s accumulated benefit obligation for its defined benefit pension plans as of December 31, 2006 and 2005 totaled $435.9 million and $428.4 million, respectively. Mattel

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does not have any defined benefit pension plans for which the plan assets exceed the accumulated benefit obligation.

The assumptions used in determining the projected and accumulated benefit obligations of Mattel’s domestic defined benefit pension and postretirement benefit plans are as follows:

	December 31,
	2006		2005
Defined benefit pension plans:
Discount rate	5.7	%	5.4	%
Weighted average rate of future compensation increases	4.0	%	4.4	%
Postretirement benefit plans:
Discount rate	5.7	%	5.4	%
Annual increase in Medicare Part B premium	6.0	%	6.0	%
Health care cost trend rate:
Pre-65	9.0	%	9.0	%
Post-65	11.0	%	10.0	%
Ultimate cost trend rate (pre- and post-65)	5.0	%	5.0	%
Year that the rate reaches the ultimate cost trend rate:
Pre-65	2011		2010
Post-65	2013		2011

The estimated future benefit payments for Mattel’s defined benefit pension and postretirement benefit plans are as follows (in thousands):

	Defined Benefit Pension Plans		Postretirement Benefit Plans Before Subsidy		Benefit of Medicare Part D Subsidy
2007	$	20,870	$	4,109	$	(375)
2008		21,092		4,183		(403)
2009		20,711		4,191		(411)
2010		20,025		4,248		(423)
2011		20,421		4,280		(425)
2012 – 2016		125,098		21,317		(2,123)

Mattel expects to make cash contributions totaling approximately $15 million to its defined benefit pension and postretirement benefit plans in 2007, including approximately $10 million for benefit payments for its unfunded plans.

Mattel’s domestic defined benefit pension plan assets are comprised of the following:

	December 31,
	2006		2005
Equity securities	75	%	70	%
Debt securities	23		26
Cash	2		4
	100	%	100	%

Mattel periodically commissions an actuarial study of the plans’ assets and liabilities to determine an asset allocation that would best match cash flows from the plans’ assets to expected benefit payments. The percentage allocation of plan assets as of December 31, 2006 approximates the target allocation of such assets. The

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Administrative Committee, which includes Mattel’s Treasurer, monitors the returns earned by the plans’ assets and reallocates investments as needed. Mattel’s defined benefit pension plan assets are not directly invested in Mattel common stock. Mattel believes that the long-term rate of return on plan assets of 8.0% as of December 31, 2006 is reasonable based on historical returns, and based on the fact that the actual return on market value of plan assets has been approximately 10% over the last ten years.

A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year would impact the postretirement benefit obligation as of December 31, 2006 by approximately $4.7 million and $(4.1) million, respectively, while a one percentage point increase/(decrease) would impact the service and interest cost recognized for 2006 by approximately $0.3 million and $(0.2) million, respectively.

The Medicare Act was signed into law on December 8, 2003. On May 19, 2004, the FASB issued FSP No. 106-2, which provides guidance as to how employers who sponsor post-65 prescription drug benefits should recognize the impact of the Medicare Act. Applying the guidance in FSP No. 106-2, Mattel, with the assistance of its outside actuaries, determined that the prescription drug benefits provided to certain retirees under one of its postretirement benefit plans are actuarially equivalent to the benefits provided under Medicare Part D, and that Mattel will be eligible to receive a federal subsidy beginning in 2006. On July 1, 2004, Mattel adopted the provisions of FSP No. 106-2 and reduced its accumulated postretirement benefit obligation by $7.6 million in recognition of the actuarial impact of the subsidy on benefits attributed to prior service. Mattel’s net periodic benefit cost for 2004 was reduced by $1.0 million in the areas of interest cost ($0.5 million) and amortization of unrecognized net actuarial loss ($0.5 million). On January 21, 2005, the Centers for Medicare and Medicaid Services released final regulations implementing the Medicare Act. The final regulations did not have a material impact on Mattel’s results of operations or financial position for the year ending December 31, 2006.

During 1999, Mattel amended The Fisher-Price Pension Plan to convert it from a career-average plan to a cash balance plan and applied for a determination letter from the IRS. In 2003, Mattel amended The Fisher-Price Pension Plan to reflect recent changes in regulations and court cases associated with cash balance plans and submitted a new application for a determination letter to the IRS. Mattel plans to convert The Fisher-Price Pension Plan to a cash balance plan upon receipt of a determination letter.

Defined Contribution Retirement Plans

Domestic employees are eligible to participate in 401(k) savings plans sponsored by Mattel or its subsidiaries, which are funded defined contribution plans satisfying ERISA requirements. Mattel makes employer contributions in cash and allows employees to allocate both their voluntary contributions and their employer automatic and matching contributions to a variety of investment funds, including a fund that is fully invested in Mattel common stock (the “Mattel Stock Fund”). Employees are not required to allocate any funds to the Mattel Stock Fund, which allows employees to limit or eliminate their exposure to market changes in Mattel’s stock price. Furthermore, Mattel’s plans limit an employee’s maximum allocation to the Mattel Stock Fund to 25% of the employee’s total account balance. Employees may generally reallocate their account balances on a daily basis. The only limitation on the frequency of reallocations applies to changes involving the Mattel Stock Fund by employees classified as insiders or restricted personnel under Mattel’s insider trading policy. Pursuant to Mattel’s insider trading policy, insiders and restricted personnel are limited to certain periods in which they may make allocations into or out of the Mattel Stock Fund.

Certain non-US employees participate in other defined contribution retirement plans with varying vesting and contribution provisions.

Deferred Compensation and Excess Benefit Plans

Mattel has a deferred compensation plan that permits certain officers and key employees to elect to defer portions of their compensation. The deferred compensation plan, together with certain contributions made by

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Mattel and participating employees to an excess benefit plan, earns various rates of return. The liability for these plans as of December 31, 2006 and 2005 was $50.6 million and $52.0 million, respectively, and is included in other noncurrent liabilities in the consolidated balance sheets. Mattel has purchased group trust-owned life insurance contracts designed to assist in funding these programs. The cash surrender value of these policies, valued at $62.5 million and $58.7 million as of December 31, 2006 and 2005, respectively, are held in an irrevocable grantor trust, the assets of which are subject to the claims of Mattel’s creditors and are included in other noncurrent assets in the consolidated balance sheets.

Incentive Compensation Plans

Mattel has annual incentive compensation plans under which officers and key employees may earn incentive compensation based on Mattel’s performance and subject to certain approvals of the Compensation Committee of the Board of Directors. For 2006, 2005, and 2004, $93.7 million, $22.0 million and $41.8 million, respectively, was charged to expense for awards under these plans.

The Mattel 2003 Long-Term Incentive Plan (the “LTIP”) was approved by Mattel’s stockholders in May 2003. The LTIP is intended to motivate and retain key executives of Mattel who regularly and directly make or influence decisions that affect the medium- and long-term success of Mattel. The LTIP replaces the Long-Term Incentive Plan approved in November 2000 and is effective as of January 1, 2003. Awards are based upon the financial performance of Mattel during a specified performance period and are settled in cash or unrestricted or restricted common stock of Mattel. In March 2003, the Compensation Committee of Mattel’s Board of Directors established a January 1, 2003—December 31, 2006 performance cycle under the LTIP and in March 2005, the Compensation Committee established a January 1, 2005—December 31, 2007 performance cycle under the LTIP. For 2006, $14.8 million was charged to expense for LTIP awards. No amounts were charged to expense in 2005 or 2004 for LTIP awards.

Note 5—Seasonal Financing and Debt

Seasonal Financing

Mattel maintains and periodically amends or replaces a $1.3 billion domestic unsecured committed revolving credit facility with a commercial bank group that is used as the primary source of financing for the seasonal working capital requirements of its domestic subsidiaries. The agreement in effect was amended and restated in March 2005 and the expiration date of the facility was extended to March 23, 2010. The other terms and conditions of the amended and restated facility are substantially similar to those contained in the previous facility. Interest is charged at various rates selected by Mattel, ranging from market commercial paper rates to the bank reference rate. The domestic unsecured committed revolving credit facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet these financial covenant ratios at the end of each fiscal quarter and fiscal year, using the formulae specified in the credit agreement to calculate the ratios. Mattel was in compliance with such covenants at the end of each fiscal quarter and fiscal year in 2006. As of December 31, 2006, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.29 to 1 (compared to a maximum allowed of 0.50 to 1) and Mattel’s interest coverage ratio was 11.72 to 1 (compared to a minimum allowed of 3.50 to 1).

On December 9, 2005, Mattel, Mattel Asia Pacific Sourcing Limited (“MAPS”), a wholly-owned subsidiary of Mattel, Bank of America, N.A., as a lender and administrative agent, and other financial institutions executed a credit agreement (“the MAPS facility”) which provides for (i) a term loan facility of $225.0 million consisting of a term loan advanced to MAPS in the original principal amount of $225.0 million, with $50.0 million of such amount to be repaid on each of December 15, 2006 and December 15, 2007, and the remaining aggregate principal amount of $125.0 million to be repaid on December 9, 2008, and (ii) a revolving loan facility consisting of revolving loans advanced to MAPS in the maximum aggregate principal amount at any time outstanding of

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$100.0 million, with a maturity date of December 9, 2008. Interest is charged at various rates selected by Mattel based on Eurodollar rates or bank reference rates. On December 15, 2006, in addition to the required payment of $50.0 million, MAPS prepaid an incremental $125.0 million of the MAPS term loan facility. The remaining $50.0 million principal amount, consisting of $14.3 million due on December 15, 2007 and $35.7 million due on December 9, 2008, was prepaid on January 16, 2007. As of December 31, 2006, there was no balance outstanding on the MAPS revolving loan facility. In connection with the MAPS facility, Mattel executed a Continuing Guaranty Agreement pursuant to which Mattel unconditionally guaranteed the obligations of MAPS arising pursuant to the MAPS facility. The MAPS facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios at the end of each fiscal quarter and fiscal year, using the formulae specified and ratios allowed in the MAPS facility to calculate the ratios. The formulae specified in the MAPS facility are the same as those required by the domestic unsecured committed revolving credit facility. Mattel was in compliance with such covenants at December 31, 2006.

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. As of December 31, 2006, foreign credit lines totaled approximately $200 million, a portion of which are used to support letters of credit. Mattel expects to extend the majority of these credit lines throughout 2007.

In June 2006, Mattel issued $100.0 million of unsecured floating rate senior notes (“Floating Rate Senior Notes”) due June 15, 2009 and $200.0 million of unsecured 6.125% senior notes (“6.125% Senior Notes”) due June 15, 2011 (collectively “Senior Notes”). Interest on the Floating Rate Senior Notes is based on the three-month US Dollar London Interbank Offered Rate (“LIBOR”) plus 40 basis points with interest payable quarterly beginning September 15, 2006. Interest on the 6.125% Senior Notes is payable semi-annually beginning December 15, 2006. The 6.125% Senior Notes may be redeemed at any time at the option of Mattel at a redemption price equal to the greater of (i) the principal amount of the notes being redeemed plus accrued interest to the redemption date, or (ii) a “make whole” amount based on the yield of a comparable US Treasury security plus 20 basis points.

In June 2006, Mattel entered into two interest rate swap agreements on the $100.0 million Floating Rate Senior Notes, each in a notional amount of $50.0 million, for the purpose of hedging the variability of cash flows in the interest payments due to fluctuations of the LIBOR benchmark interest rate. These cash flow hedges are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, whereby the hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in accumulated other comprehensive loss. Under the terms of the agreements, Mattel receives quarterly interest payments from the swap counterparties based on the three-month LIBOR plus 40 basis points and makes semi-annual interest payments to the swap counterparties based on a fixed rate of 5.87125%. The three-month LIBOR rate used to determine interest payments under the interest rate swap agreements resets every three months, matching the variable interest on the Floating Rate Senior Notes. The agreements expire in June 2009, which corresponds with the maturity of the Floating Rate Senior Notes.

In October 2005, a major credit rating agency maintained its long-term rating for Mattel at BBB, but changed its long-term outlook to negative and reduced its short-term rating to A-3. In March 2006, this same credit rating agency reduced Mattel’s long-term credit rating to BBB- and changed the outlook from negative to stable. Also in October 2005, another major credit rating agency maintained its long-term rating for Mattel at Baa2, but changed its long-term outlook to negative. In May 2006, another major credit rating agency reduced Mattel’s long-term credit rating to BBB. Management does not expect these actions to have a significant impact on Mattel’s ability to obtain financing or to have a significant negative impact on Mattel’s liquidity or results of operations.

Mattel believes its cash on hand at the beginning of 2007, amounts available under its domestic unsecured committed revolving credit facility, the MAPS facility, and its foreign credit lines will be adequate to meet its

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seasonal financing requirements in 2007. As of December 31, 2006, Mattel had available incremental borrowing resources totaling approximately $1.3 billion under its domestic unsecured committed revolving credit facility, the MAPS facility and foreign credit lines.

Mattel has a $300.0 million domestic receivables sales facility that is a sub-facility of Mattel’s domestic unsecured committed revolving credit facility. The outstanding amount of receivables sold under the domestic receivables facility may not exceed $300.0 million at any given time, and the amount available to be borrowed under the credit facility is reduced to the extent of any such outstanding receivables sold. Under the domestic receivables facility, certain trade receivables are sold to a group of banks, which currently include, among others, Bank of America, N.A., as administrative agent, Citicorp USA, Inc. and Barclays Bank PLC, as co-syndication agents, and Societe Generale and BNP Paribas, as co-documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell eligible trade receivables from Wal-Mart and Target to Mattel Factoring, Inc. (“Mattel Factoring”), a Delaware corporation and wholly-owned, consolidated subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. Pursuant to the terms of the domestic receivables facility and simultaneous with each receivables purchase, Mattel Factoring sells those receivables to the bank group. Mattel records the transaction, reflecting cash proceeds and sale of accounts receivable in its consolidated balance sheet, at the time of the sale of the receivables to the bank group.

Sales of receivables pursuant to the domestic receivables sale facility occur periodically, generally quarterly. The receivables are sold by Mattel Sales Corp. and Fisher-Price, Inc. to Mattel Factoring for a purchase price equal to the nominal amount of the receivables sold. Mattel Factoring then sells such receivables to the bank group at a slight discount, and Mattel acts as a servicer for such receivables. Mattel has designated Mattel Sales Corp. and Fisher-Price, Inc. as sub-servicers, as permitted by the facility. Mattel’s appointment as a servicer is subject to termination events that are customary for such transactions. The domestic receivables sales facility is also subject to conditions to funding, representations and warranties, undertakings and early termination events that are customary for transactions of this nature. Mattel retains a servicing interest in the receivables sold under this facility. The fair value of the net servicing asset is based on an estimate of interest Mattel earns on cash collections prior to remitting the funds to the bank group, partially offset by an estimate of the cost of servicing the trade receivables sold. The fair value of the net servicing asset totaled $2.3 million at December 31, 2006.

Until the Master Agreement was terminated on February 9, 2007, Mattel International Holdings B.V., a company incorporated in the Netherlands (the “Depositor”), Mattel France, a company incorporated in France (“Mattel France”), and Mattel GmbH, a company incorporated in Germany (“Mattel Germany”), each of which is a subsidiary of Mattel, and Societe Generale Bank Nederland N.V. (“SGBN”), were parties to a Master Agreement for the Transfer of Receivables that established a Euro 150 million European trade receivables facility (the “European trade receivables facility”), pursuant to which Mattel France and Mattel Germany sold trade receivables to SGBN. The European trade receivables facility was subject to conditions to funding, representations and warranties, undertakings and early termination events that were customary for transactions of this nature.

Sales of receivables pursuant to the European trade receivables facility occurred monthly, with the last such sale occurring on January 10, 2007. The receivables were sold by Mattel France and Mattel Germany directly to SGBN for a purchase price equal to the nominal amount of the receivables sold. As a result, no Mattel subsidiary was used as a special purpose entity in connection with these transactions. A portion of the purchase price was funded by SGBN and a portion by a deposit provided by the Depositor. The amount of the deposit was reset on each date on which new receivables were sold. During the 12-month period ending December 31, 2006, the deposit was, on average, equal to about 51% of the aggregate notional amount of sold receivables outstanding during such period. The deposit totaled $120.1 million and $97.8 million as of December 31, 2006 and December 31, 2005, respectively.

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As with the domestic receivables facility, each sale of accounts receivable was recorded in Mattel’s consolidated balance sheet at the time of such sale. Under the European trade receivables facility, the outstanding amount of receivables sold could not exceed Euro 60 million from February 1 through July 31 of each year and could not exceed Euro 150 million at all other times.

Each of Mattel France and Mattel Germany was appointed to service the receivables sold by it to SGBN. No servicing fees were paid by SGBN for such services. The appointment of each of Mattel France and Mattel Germany to act as servicer was subject to termination events that were customary for transactions of this nature. The fair value of the net servicing asset was based on an estimate of interest Mattel would earn on cash collections prior to remitting the funds to the purchaser, partially offset by an estimate of the cost of servicing the trade receivables sold. The net servicing asset for the European trade receivables facility was not material at December 31, 2006 or 2005.

Mattel France and Mattel Germany were obligated to pay certain fees to the Depositor in consideration of the Depositor providing the deposit to SGBN. During the 12-month period ending December 31, 2006, fees paid by Mattel France and Mattel Germany to the Depositor were, on average, approximately 0.11% of the aggregate notional amount of sold receivables outstanding during such period.

In November 2006, the commitment termination date for the European trade receivables facility was extended until February 28, 2007. However, effective on February 9, 2007, the Depositor, Mattel France and Mattel Germany terminated the European trade receivable facility with SGBN. The Company determined the facility was no longer necessary based on projected international cash flows and seasonal financing needs.

Mattel’s aggregate losses on receivables sold under the domestic and European trade receivables facilities were $11.8 million, $8.7 million, and $6.4 million during the years ended December 31, 2006, 2005, and 2004, respectively.

The outstanding amounts of accounts receivable that have been sold under these facilities and other factoring arrangements, net of collections from customers, have been excluded from Mattel’s consolidated balance sheets and are summarized as follows (in thousands):

	December 31,
	2006		2005
Receivables sold pursuant to the:
Domestic receivables facility	$	255,871	$	251,372
European receivables facility		103,886		95,946
Other factoring arrangements		52,505		95,763
	$	412,262	$	443,081

Short-Term Borrowings

As of December 31, 2006, Mattel had no foreign short-term bank loans outstanding and no short-term revolving loans outstanding under the MAPS revolving loan facility. As of December 31, 2005, Mattel had foreign short-term bank loans outstanding totaling $18.0 million, at a weighted average interest rate of 6.5% and short-term revolving loans outstanding of $100.0 million under the MAPS revolving loan facility, at a rate of 4.9%.

During 2006 and 2005, Mattel had average borrowings of $0 and $640.0 million, respectively, under its domestic unsecured committed credit facilities, $47.1 million and $2.7 million, respectively, under the MAPS revolving loan facility, and $30.4 million and $32.9 million, respectively, under its foreign credit lines and other short-term borrowings to help finance its seasonal working capital requirements. The weighted average interest rate on domestic borrowings was 3.1% during 2005, 5.4% and 4.9% on the MAPS revolving loan facility during

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2006 and 2005, respectively, and 10.0% and 10.8% during 2006 and 2005, respectively, on the foreign credit lines and short-term borrowings.

Long-Term Debt

Mattel’s long-term debt consists of the following (in thousands):

	December 31,
	2006			2005
Medium-term notes due May 2007 to November 2013	$	350,000		$	400,000
Senior Notes due June 2009 to June 2011		300,000			—
MAPS term loan facility due December 2007 to December 2008		50,000			225,000
		700,000			625,000
Less: current portion		(64,286	)		(100,000	)
Total long-term debt	$	635,714		$	525,000

Mattel’s Medium-term notes bear interest at fixed rates ranging from 6.50% to 7.49%, with a weighted average interest rate of 7.09% and 7.08% as of December 31, 2006 and 2005, respectively. During 2006, Mattel repaid $50.0 million of Medium-term notes upon maturity.

In June 2006, Mattel issued $100.0 million of unsecured Floating Rate Senior Notes due June 15, 2009 and $200.0 million of unsecured 6.125% Senior Notes due June 15, 2011. In June 2006, Mattel entered into two interest rate swap agreements on the $100.0 million Floating Rate Senior Notes, each in a notional amount of $50.0 million, for the purpose of hedging the variability of cash flows in the interest payments due to fluctuations of the LIBOR benchmark interest rate.

In December 2006, Mattel repaid $50.0 million and prepaid $125.0 million of the MAPS term loan facility. In January 2007, Mattel repaid the remaining $50.0 million of the MAPS term loan facility. The MAPS term loan facility bears interest at various rates as selected by Mattel, based on Eurodollar rates or bank reference rates, with a weighted average interest rate of 5.6% and 5.2% during 2006 and 2005, respectively.

During 2005, Mattel repaid $150.0 million of 6 ¹/8% senior notes and the 10.15% mortgage note for $39.1 million upon maturity.

The aggregate amount of long-term debt maturing in the next five years is as follows (in thousands):

	Medium- Term Notes		Senior Notes		MAPS Term Loan		Total
2007	$	50,000	$	—	$	14,286	$	64,286
2008		50,000		—		35,714		85,714
2009		50,000		100,000		—		150,000
2010		50,000		—		—		50,000
2011		50,000		200,000		—		250,000
Thereafter		100,000		—		—		100,000
	$	350,000	$	300,000	$	50,000	$	700,000

Note 6—Stockholders’ Equity

Preference Stock

Mattel is authorized to issue up to 20.0 million shares of $0.01 par value preference stock, of which none is currently outstanding.

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Preferred Stock

Mattel is authorized to issue up to 3.0 million shares of $1.00 par value preferred stock, of which none is currently outstanding.

Common Stock Repurchase Program

The Board of Directors approved an increase to the share repurchase program of an additional $250.0 million in November 2003 and, at that time, there were share repurchase authorizations that had not been executed totaling $5.6 million. During 2004, Mattel repurchased 14.7 million shares at a cost of $255.1 million. In 2005, the Board of Directors approved the repurchase of an additional $500.0 million of Mattel’s common stock. During 2005, Mattel repurchased 28.9 million shares at a cost of $500.4 million. In January 2006, the Board of Directors authorized Mattel to increase its share repurchase program by an additional $250.0 million. During 2006, Mattel repurchased 11.8 million shares at a cost of $192.7 million. At December 31, 2006, share repurchase authorizations of $57.3 million had not been executed. Repurchases take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date.

Dividends

In 2006, 2005 and 2004, Mattel paid a dividend per share of $0.65, $0.50 and $0.45, respectively, to holders of its common stock. The Board of Directors declared the dividend in November, and Mattel paid the dividend in December of each year. The payment of dividends on common stock is at the discretion of Mattel’s Board of Directors and is subject to customary limitations.

Comprehensive Income (Loss)

The changes in the components of other comprehensive income (loss), net of tax, are as follows (in thousands):

	For the Year
	2006			2005			2004
Net income	$	592,927		$	417,019		$	572,723
Currency translation adjustments		69,632			(38,767	)		36,380
Minimum pension liability adjustments		21,465			(7,243	)		(1,430	)
Net unrealized gain (loss) on derivative instruments:
Unrealized holding (losses) gains		(13,063	)		25,348			(33,232	)
Reclassification adjustment for realized losses included in net income		2,276			3,904			31,820
		80,310			29,252			(1,412	)
Net unrealized gains on securities:
Unrealized holding gains		—			(195	)		(4,820	)
Reclassification adjustment for realized gains included in net income		—			(16,247	)		(11,539	)
		—			(16,442	)		(16,359	)
	$	673,237		$	383,819		$	589,902

For 2006, currency translation adjustments resulted in a net gain of $69.6 million, with gains from the strengthening of the Euro and British pound sterling against the US dollar, partially offset by the weakening of the Mexican peso against the US dollar. For 2005, currency translation adjustments resulted in a net loss of $38.8 million, with losses from the weakening of the Euro and British pound sterling against the US dollar being partially offset by gains from the strengthening of the Mexican peso against the US dollar. For 2004, currency translation adjustments resulted in a net gain of $36.4 million, with gains from the strengthening of the British

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pound sterling, Euro, and Mexican peso against the US dollar being partially offset by losses from the weakening of the Indonesian rupiah against the US dollar.

The components of accumulated other comprehensive loss are as follows (in thousands):

	December 31,
	2006			2005
Currency translation adjustments	$	(168,927	)	$	(238,559	)
Minimum pension liability adjustments, net of tax		(47,250	)		(68,715	)
Net unrealized (loss) gain on derivative instruments, net of tax		(6,541	)		4,246
Adjustment for initial adoption of SFAS No. 158, net of tax		(54,143	)		—
	$	(276,861	)	$	(303,028	)

Note 7—Share-Based Payments

Mattel Stock Option Plans

In May 2005, Mattel’s stockholders approved the Mattel, Inc. 2005 Equity Compensation Plan (the “2005 Plan”). Upon approval of the 2005 Plan, Mattel terminated its Amended and Restated 1996 Stock Option Plan (the “1996 Plan”) and its 1999 Stock Option Plan (the “1999 Plan”), except with regard to grants then outstanding under the 1996 Plan and the 1999 Plan. Restricted stock awards made under the 1996 Plan continue to vest pursuant to the terms of their respective grant agreements. Outstanding stock option grants under plans that have expired or have been terminated continue to be exercisable under the terms of their respective grant agreements. All such stock options expire no later than ten years from the date of grant and generally provide for vesting over a period of three years from the date of grant. Except as discussed below (“Stock Option Review”), stock options generally were granted with exercise prices equal to the fair market value of Mattel’s common stock on the date of grant, although there are a few outstanding stock options that were granted with an exercise price in excess of the fair market value of Mattel’s common stock on the date of grant, as to which vesting was dependent upon Mattel’s common stock achieving a specified fair market value during a specified time period. Options were granted to non-employee members of Mattel’s Board of Directors under the 1996 Plan with exercise prices equal to the fair market value of Mattel’s common stock on the date of grant; such options expire no later than ten years from the date of grant and vest over a period of four years from the date of grant.

Under the 2005 Plan, Mattel has the ability to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, dividend equivalent rights and shares of common stock to officers, employees, and other persons providing services to Mattel. Generally, options vest and become exercisable contingent upon the grantees’ continued employment with Mattel. In the event of a retirement of an employee aged 55 years or greater with 5 or more years of service that occurs at least 6 months after the grant date, nonqualified stock options become fully vested. A similar provision exists for non-employee directors. Nonqualified stock options are granted at not less than 100% of the fair market value of Mattel’s common stock on the date of grant, expire no later than ten years from the date of grant and vest on a schedule determined by the Compensation Committee of the Board of Directors, generally during a period of three years from the date of grant. RSUs granted under the 2005 Plan are generally accompanied by dividend equivalent rights and generally vest over a period of three years from the date of grant. The 2005 Plan also contains provisions regarding grants of equity compensation to the non-employee members of the Board of Directors. Pursuant to these provisions, the Compensation Committee has approved grants to non-employee members of the Board of Directors that consist of a mix of nonqualified stock options and restricted stock units; such stock options and restricted stock units vest over a period of three years from the date of grant, and such stock options have exercise prices equal to the fair market value of Mattel’s common stock on the date of grant and expire no later than ten years from the date of grant. The 2005 Plan expires on May 18, 2015, except as to any grants then outstanding.

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The number of shares of common stock available for grant under the 2005 Plan is subject to an aggregate limit of 50 million shares and is further subject to share-counting rules as provided in the 2005 Plan. As a result of such share-counting rules, full-value grants such as grants of restricted stock or restricted stock units count against shares remaining available for grant at a higher rate than grants of stock options and stock appreciation rights. Each stock option or stock appreciation right grant is treated as using one available share for each share actually subject to such grant, whereas each full-value grant is treated as using three available shares for each share actually subject to such full-value grant. The 2005 Plan contains detailed provisions with regard to share-counting.

Effective January 1, 2006, Mattel adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective transition method. Prior to January 1, 2006, Mattel applied the recognition and measurement principles of APB Opinion No. 25, and related interpretations in accounting for its employee stock compensation plans. The amount of additional compensation expense that would have resulted if Mattel had applied the fair value recognition provisions of SFAS No. 123 was included as a proforma disclosure in the financial statement footnotes.

Prior to January 1, 2006, Mattel presented all benefits of tax deductions resulting from the exercise of share-based compensation as operating cash flows in the statements of cash flows. SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) be classified as financing cash flows and benefits of tax deductions less than the compensation cost recognized for those options (“shortfalls”) be classified as operating cash flows. Excess tax benefits reflected as a financing cash inflow totaled $12.0 million during the year ended December 31, 2006. Excess tax benefits (shortfalls) reflected as operating cash inflows (outflows) totaled $(3.5) million, $4.3 million, and $(0.4) million during the years ended December 31, 2006, 2005, and 2004, respectively.

On December 28, 2005, the Compensation Committee of the Board of Directors of Mattel approved the acceleration of vesting of options for approximately 12.4 million shares with an exercise price of $16.09 or greater granted to employees other than Mattel’s Chairman and Chief Executive Officer. Vesting was not accelerated as to stock options held by any member of the Board of Directors. The primary purpose of the accelerated vesting was to avoid recognizing future compensation expense associated with the accelerated stock options under SFAS No. 123(R). Additionally, for financial reporting purposes, there may be other potential tax benefits derived from accelerating the vesting of stock options.

As of December 31, 2006, total unrecognized compensation cost related to unvested share-based payments totaled $29.3 million and is expected to be recognized over a weighted-average period of 2.5 years.

Stock Option Review

In August 2006, two derivative shareholder lawsuits were filed against Mattel and certain of its past and present executive officers and members of its Board of Directors in Los Angeles County Superior Court, alleging that certain stock option grants had been backdated (the “State Court Derivative Shareholder Lawsuits”). During the third quarter of 2006, Mattel commenced and completed a comprehensive review of its historical stock option practices for grants made during the period from the fourth quarter of 1993 through the third quarter of 2006. Outside legal counsel participated in this review, including performing certain investigative procedures.

The review found that there had been no backdating of stock option grants, no misconduct or manipulation associated with stock option grant dates, no intentional deviations from generally accepted accounting principles, and no material inaccuracies with respect to the current or historical financial statements of Mattel. The review did identify some administrative procedural deficiencies that resulted in unintentional accounting errors, principally relating to situations in which, as of the grant date approved by the Compensation Committee, an aggregate number of options to be granted was approved and the exercise price for the options was established, but the allocation of those options to certain individual employee recipients was not yet finalized (thus resulting

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in later measurement dates for accounting purposes for those individual grants). These accounting errors related to grants made to the general population of employees. The review found no such errors associated with any executive officer or Board member grants and no errors associated with any grants made after 2002.

The unintentional accounting errors associated with the use of incorrect measurement dates for certain grants caused non-cash compensation expense to be understated by a cumulative amount of $19.3 million ($13.3 million net of income tax) over the years 1995 through 2005. All of the errors were related to grants made prior to 2003, and the impact on income from continuing operations was not material to any previously reported period (less than 1% in every year). Because the errors are not material to any prior period financial statement and the impact on the current year of correcting the cumulative errors is also not material, a correcting entry to record the cumulative impact of these errors was recorded in the third quarter of 2006. The entry increased other selling and administrative expenses by $19.3 million and reduced provision for income taxes by $6.0 million, which resulted in a $13.3 million reduction in net income. The correcting adjustment also had the effect of increasing noncurrent deferred tax assets by $3.5 million and additional paid-in capital by $16.8 million as of December 31, 2006.

In January 2007, two additional shareholder derivative lawsuits were filed against Mattel and certain of its past and present executive officers and members of its Board of Directors in United States District Court for the Central District of California, alleging that certain stock options grants had been backdated (the “Federal Court Derivative Shareholder Lawsuits”). The factual allegations in the Federal Court Derivative Shareholder Lawsuits are identical to those in the State Court Derivative Shareholder Lawsuits.

In light of the results of the review of its historical stock option practices, Mattel does not believe that final resolution of the State Court Derivative Shareholder Lawsuits or the Federal Court Derivative Shareholder Lawsuits will have a material adverse impact on its consolidated results of operations or financial position.

Stock Options

In addition to the $19.3 million pre-tax charge for prior period unintentional stock option accounting errors, Mattel recognized compensation expense of $4.6 million for stock options during the year ended December 31, 2006 as a component of other selling and administrative expenses.

As a result of adopting SFAS No. 123(R) on January 1, 2006, Mattel’s income before income taxes and net income for the year ended December 31, 2006, are $4.6 million and $2.9 million lower, respectively, than if Mattel had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for the year ended December 31, 2006 are $0.01 and $0.01 lower, respectively, than if Mattel had continued to account for share-based compensation under APB Opinion No. 25.

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Prior to January 1, 2006, no compensation expense was recognized in the consolidated statements of operations for stock options. Had compensation expense in 2005 and 2004 for nonqualified stock options granted been determined based on their fair value at the measurement date, consistent with the fair value method of accounting prescribed by SFAS No. 123, Mattel’s net income and net income per common share would have been adjusted as follows (amounts in millions, except per share amounts):

	For the Year
	2005			2004
Net income
As reported	$	417.0		$	572.7
Pro forma compensation cost, net of tax		(49.0	)		(32.9	)
Pro forma net income	$	368.0		$	539.8
Net income per common share
Basic
As reported	$	1.02		$	1.37
Pro forma compensation cost, net of tax		(0.12	)		(0.08	)
Pro forma net income per common share—basic	$	0.90		$	1.29
Diluted
As reported	$	1.01		$	1.35
Pro forma compensation cost, net of tax		(0.11	)		(0.08	)
Pro forma net income per common share—diluted	$	0.90		$	1.27

The fair value of options granted has been estimated using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding, and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on Mattel’s historical annual dividend payout, and the risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues. The following weighted average assumptions were used in determining fair value for options granted:

	2006		2005		2004
Options granted at market price
Expected life (in years)	5.1		4.9		6.3
Risk-free interest rate	4.9	%	4.1	%	4.0	%
Volatility factor	28.0	%	27.6	%	38.5	%
Dividend yield	2.8	%	2.4	%	1.2	%

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The following is a summary of stock option information and weighted average exercise prices for Mattel’s stock option plans during the year ended December 31, 2006 (amounts in thousands, except average exercise price and average remaining life):

	2006				2005				2004
	Number		Average Exercise Price		Number		Average Exercise Price		Number		Average Exercise Price
Outstanding at January 1	47,851		$	18.53	45,437		$	18.57	42,733		$	19.07
Granted	2,505			17.90	7,619			18.68	7,455			16.98
Exercised	(7,385	)		16.12	(2,077	)		13.68	(1,595	)		13.82
Forfeited	(19	)		17.94	(938	)		18.88	(901	)		18.87
Canceled	(4,445	)		22.51	(2,190	)		23.09	(2,255	)		25.10
Outstanding at December 31	38,507		$	18.50	47,851		$	18.53	45,437		$	18.57
Exercisable at December 31	35,529		$	18.54	46,871		$	18.54	32,371		$	18.69
Available for grant at December 31	35,961				42,472				11,274

There were 50 million shares of common stock authorized for equity instrument awards under the 2005 Plan.

The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of an option. The total intrinsic value of options exercised during the year ended December 31, 2006, 2005 and 2004 was $38.6 million, $13.3 million and $6.8 million, respectively. At December 31, 2006, the total intrinsic value of options outstanding was $197.7 million, with an average remaining life of 5.1 years. At December 31, 2006, the total intrinsic value of options exercisable was $183.7 million, with an average remaining life of 4.9 years.

Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises. Cash received from stock options exercised during the year ended December 31, 2006 and 2005 was $116.9 million and $28.4 million, respectively, and the tax benefit for exercises during the year ended December 31, 2006 and 2005 was $8.5 million and $4.3 million, respectively.

Learning Company Stock Option Plans

Prior to its 1999 merger, with Mattel, The Learning Company (“Learning Company”) and its subsidiaries had various incentive and nonqualified stock option plans that provided benefits for eligible employees and non-employee directors. Effective with the 1999 merger, each option outstanding under these plans was converted into an option to purchase 1.2 shares of Mattel common stock. The exercise price of such options was adjusted by dividing the Learning Company option price by 1.2. Other than options granted under some plans assumed by Learning Company in connection with acquisitions, all Learning Company stock options vested and became fully exercisable as a result of the 1999 merger. No options were available for grant under any Learning Company stock option plan during 2006, 2005, or 2004.

The following is a summary of stock option information and weighted average exercise prices for Learning Company’s stock option plans during the year (options in thousands):

	2006				2005			2004
	Number		Price		Number	Price		Number		Price
Outstanding at January 1	77		$	4.54	77	$	4.54	81		$	4.63
Options exercised	(77	)		4.54	—		—	(4	)		4.88
Options canceled	—			—	—		—	—			—
Outstanding and exercisable at December 31	—		$	—	77	$	4.54	77		$	4.54

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Restricted Stock and Restricted Stock Units

Compensation expense recognized related to grants of restricted stock and RSUs to certain employees and non-employee Board members was $3.6 million for the year ended December 31, 2006.

The following table summarizes the number and weighted average grant date fair value of Mattel’s unvested restricted stock and RSUs as of December 31, 2006 (shares in thousands):

	Shares		Weighted-average grant date fair value
Unvested at January 1, 2006	220		$	12.55
Granted	1,615			17.95
Vested	(5	)		20.70
Forfeited	(19	)		17.94
Unvested at December 31, 2006	1,811			17.28

Note 8—Financial Instruments

Marketable Securities

As of December 31, 2006 and 2005, Mattel held no marketable securities.

During 2005 and 2004, Mattel sold marketable securities for proceeds totaling $42.0 million and $28.2 million, respectively. Gains on sales of these securities totaling $25.8 million and $18.3 million, net of transaction costs, were recorded in other non-operating (income), net in the consolidated statements of operations for 2005 and 2004, respectively.

Derivative Financial Instruments

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Inventory sale transactions denominated in the Euro, British pound sterling, Canadian dollar Mexican peso, Hong Kong dollar and Indonesian rupiah are the primary transactions that caused currency transaction exposure for Mattel during 2006 and 2005. Mattel seeks to mitigate its exposure to market risk by monitoring its currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange and option contracts. Such contracts are primarily used to hedge Mattel’s purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes. The ineffectiveness related to cash flow hedges was not significant during any year.

Mattel uses fair value derivatives to hedge most intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these contracts. Changes in the fair value of these derivatives were not significant to the results of operations during any year.

As of December 31, 2006 and 2005, Mattel held foreign currency forward exchange contracts with notional amounts totaling $1,088.6 million and $727.2 million. The notional amounts of these contracts were equal to the exposure hedged in both years.

The net loss on derivative financial instruments reclassified from accumulated other comprehensive loss to Mattel’s results of operations was $2.3 million, $3.9 million and $31.8 million during 2006, 2005 and 2004, respectively. As of December 31, 2006, $6.7 million of pre-tax unrealized losses ($6.5 million net of tax) and

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December 31, 2005, $4.5 million of pre-tax unrealized gains ($4.2 million net of tax), related to derivative instruments have been recorded in accumulated other comprehensive loss. Mattel expects to reclassify the unrealized gains as of December 31, 2006 from accumulated other comprehensive loss to its results of operations over the life of the contracts, generally within 18 months or less.

Fair Value of Financial Instruments

Mattel’s financial instruments include cash, cash equivalents, marketable securities, investments, accounts receivable and payable, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.

The estimated fair value of Mattel’s long-term debt, including the current portion, is $714.9 million (compared to a carrying amount of $700.0 million) as of December 31, 2006 and $644.6 million (compared to a carrying amount of $625.0 million) as of December 31, 2005. The estimated fair value has been calculated based on broker quotes or rates for the same or similar instruments.

The estimated fair value of derivative financial instruments recognized in Mattel’s consolidated balance sheets is as follows (in thousands):

	December 31,
	2006			2005
Accounts receivable	$	2,961		$	1,309
Prepaid expenses and other current assets		2,072			6,218
Accrued liabilities		(8,706	)		(2,231	)
Other non-current liabilities		(81	)		—

The estimated fair value of derivative financial instruments is based on dealer quotes and reflects the amount that Mattel would receive or pay at maturity for contracts involving the same currencies and maturity dates, if they had been entered into as of December 31, 2006 or 2005, respectively.

Note 9—Commitments and Contingencies

Leases

Mattel routinely enters into noncancelable lease agreements for premises and equipment used in the normal course of business. Certain of these leases include escalation clauses that adjust rental expense to reflect changes in price indices, as well as renewal options. In addition to minimum rental payments, certain of Mattel’s leases require additional payments to reimburse the lessors for operating expenses such as real estate taxes, maintenance, utilities and insurance. Rental expense is recorded on a straight-line basis, including escalating minimum payments. The American Girl Place^® leases in Chicago, Illinois, New York, New York, and Los Angeles, California, also contain provisions for additional rental payments based on a percentage of the sales of each store after reaching certain sales benchmarks. Contingent rental expense is recorded in the period in which the contingent event becomes probable. The following table shows the future minimum obligations under lease commitments in effect at December 31, 2006 (in thousands):

	Capitalized Leases			Operating Leases
2007	$	300		$	71,000
2008		300			58,000
2009		300			48,000
2010		300			42,000
2011		300			40,000
Thereafter		7,300			228,000
	$	8,800	(a)	$	487,000

(a) Includes $6.5 million of imputed interest.

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Rental expense under operating leases amounted to $86.9 million, $77.6 million and $73.7 million for 2006, 2005 and 2004, respectively, net of sublease income of $1.1 million, $1.3 million and $1.7 million in 2006, 2005 and 2004, respectively.

Commitments

In the normal course of business, Mattel enters into contractual arrangements to obtain and protect Mattel’s right to create and market certain products, and for future purchases of goods and services to ensure availability and timely delivery. Such arrangements include royalty payments pursuant to licensing agreements and commitments for future inventory purchases. Certain of these commitments routinely contain provisions for guaranteed or minimum expenditures during the term of the contracts. Current and future commitments for guaranteed payments reflect Mattel’s focus on expanding its product lines through alliances with businesses in other industries.

Licensing and similar agreements provide for terms extending from 2007 through 2011 and contain provisions for future minimum payments as shown in the following table (in thousands):

	Minimum Payments
2007	$	39,000
2008		38,000
2009		24,000
2010		21,000
2011		13,000
Thereafter		—
	$	135,000

Royalty expense for 2006, 2005 and 2004 was $261.2 million, $225.6 million and $204.5 million, respectively.

As of December 31, 2006, Mattel had outstanding commitments for purchases of inventory, other assets and services totaling $372.9 million in fiscal year 2007.

Insurance

Mattel has a wholly-owned subsidiary, Far West Insurance Company, Ltd. (“Far West”), that was established to insure Mattel’s workers’ compensation, general, automobile and product liability risks. Far West insures the first $1.0 million per occurrence of Mattel’s workers’ compensation, the first $0.5 million for general and automobile liability risks and the first $2.0 million per occurrence of product liability risks. Various insurance companies, that have an “A” or better AM Best rating at the time the policies are purchased, reinsure Mattel’s risk in excess of the amounts insured by Far West. Mattel’s liability for reported and incurred but not reported claims at December 31, 2006 and 2005 totaled $20.3 million and $22.1 million, respectively, and is included in the consolidated balance sheets. Loss reserves are accrued based on Mattel’s estimate of the aggregate liability for claims incurred using a study prepared by an independent actuary.

Litigation

Litigation Related to LeapFrog Enterprises, Inc.

Fisher-Price, Inc. (“Fisher-Price”), a subsidiary of Mattel, was sued for patent infringement by LeapFrog Enterprises, Inc. in a lawsuit filed in October 2003 in the United States District Court for the District of Delaware, and in September 2004, Mattel was joined to the lawsuit as a defendant. The lawsuit alleged that Fisher-Price’s PowerTouch^™ system infringed a LeapFrog patent relating to an electronic learning device for

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teaching phonics. A 10-day trial commenced on May 16, 2005, which resulted in a deadlocked jury. As an alternative to retrying the case, the parties agreed to submit the case for decision, based on the existing trial record, to the presiding judge. The plaintiff in this lawsuit asserted a total damages claim of up to approximately $90 million, which was reduced to approximately $58 million pursuant to rulings by the Court, and sought an injunction preventing the further sale of the PowerTouch^™ system; the damages could possibly have been trebled if a willful infringement had been found. On March 30, 2006, the Court issued a Memorandum and Order holding that Mattel and Fisher-Price did not infringe LeapFrog’s patent and furthermore holding that LeapFrog’s patent claim, which was the basis of LeapFrog’s lawsuit, was invalid due to obviousness. On May 1, 2006, LeapFrog filed an appeal of the Court’s ruling with the Court of Appeals for the Federal Circuit. Both parties have filed their briefs with regard to the appeal, and the Court of Appeals has scheduled a hearing on March 7, 2007 for oral arguments. Mattel and its subsidiary Fisher-Price continue to believe the action is without merit and intend to continue defending themselves vigorously.

Litigation Related to Carter Bryant and MGA Entertainment, Inc.

In April 2004, Mattel filed a lawsuit in Los Angeles County Superior Court against Carter Bryant (“Bryant”), a former Mattel design employee. The suit alleges that Bryant aided and assisted a Mattel competitor, MGA Entertainment, Inc. (“MGA”), during the time he was employed by Mattel, in violation of his contractual and other duties to Mattel. In September 2004, Bryant asserted counterclaims against Mattel, including counterclaims in which Bryant sought, as a putative class action representative, to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees. In December 2004, MGA intervened as a party-defendant in Mattel’s action against Bryant, asserting that its rights to the “Bratz” property are at stake in the litigation. Mattel’s suit was removed to the United States District Court for the Central District of California.

Separately, in November 2004, Bryant filed an action against Mattel in the United States District Court for the Central District of California. The action sought a judicial declaration that Bryant’s purported conveyance of rights in “Bratz” was proper and that he did not misappropriate Mattel property in creating “Bratz.”

In April 2005, MGA filed suit against Mattel in the United States District Court for the Central District of California. MGA’s action alleges claims of trade dress infringement, trade dress dilution, false designation of origin, unfair competition and unjust enrichment. The suit alleges, among other things, that certain products, themes, packaging and/or television commercials in various Mattel product lines have infringed upon products, themes, packaging and/or television commercials for various MGA product lines, including “Bratz.” The complaint also asserts that various alleged Mattel acts with respect to unidentified retailers, distributors and licensees have damaged MGA and that various alleged acts by industry organizations, purportedly induced by Mattel, have damaged MGA. MGA’s suit alleges that MGA has been damaged in an amount “believed to reach or exceed tens of millions of dollars” and further seeks punitive damages, disgorgement of Mattel’s profits and injunctive relief.

In June 2006, the three cases were consolidated in the United States District Court for the Central District of California. On July 17, 2006, the Court issued an order dismissing all claims that Bryant had asserted against Mattel, including Bryant’s purported counterclaims to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees, and Bryant’s claims for declaratory relief. Although Bryant was given leave by the Court to file amended claims consistent with the Court’s rulings, Bryant did not do so within the time period allowed. Mattel believes the claims against it are without merit and intends to continue to vigorously defend against them.

In November 2006, Mattel asked the Court for leave to file an Amended Complaint that included not only additional claims against Bryant, but also included claims for copyright infringement, RICO violations, misappropriation of trade secrets, intentional interference with contract, aiding and abetting breach of fiduciary duty and breach of duty of loyalty, and unfair competition, among others, against MGA Entertainment, Inc., Isaac Larian, certain MGA affiliates and an MGA employee. The basis for the Amended Complaint was the MGA defendants’ infringement of Mattel’s copyrights and their pattern of misappropriation of trade secrets and

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unfair competition in violation of the applicable statutes. On January 12, 2007, the Court allowed Mattel to file these claims as counterclaims in the consolidated cases, which Mattel did that same day. Neither Bryant nor the MGA defendants have responded to the counterclaims.

Environmental

Beaverton, Oregon

Mattel previously operated a manufacturing facility on a leased property in Beaverton, Oregon that was acquired as part of the March 1997 merger with Tyco Toys, Inc. In March 1998, samples of groundwater used by the facility for process water and drinking water disclosed elevated levels of certain chemicals, including trichloroethylene. Mattel immediately closed the water supply and self-reported the sample results to the Oregon Department of Environmental Quality (“ODEQ”) and the Oregon Health Division. Mattel also implemented a community outreach program to employees, former employees and surrounding landowners.

Prior to 2003, Mattel recorded pre-tax charges totaling $19.0 million related to this property. During 2004 and 2003, Mattel recognized pre-tax income of $0.9 million and $7.9 million, respectively, representing adjustments to the reserve accrued in 1999 associated with the closure of the Beaverton facility. Costs totaling approximately $7.0 million have been incurred through December 31, 2006 for the Beaverton property, largely related to environmental remediation, attorney fees, consulting work and an employee medical screening program. In January 2003, Mattel entered into a settlement with the ODEQ resolving its cleanup liability in return for a contribution of $0.4 million to the cleanup, which is being performed by the company that caused the contamination. The remaining liability of approximately $3.2 million as of December 31, 2006 represents estimated amounts to be incurred for employee medical screening, project management, and other costs related to the Beaverton property.

General

Mattel is also involved in various other litigation and legal matters, including claims related to intellectual property, product liability and labor, as well as environmental matters, which Mattel is addressing or defending in the ordinary course of business. Management believes that any liability that may potentially result upon resolution of such matters will not have a material adverse effect on Mattel’s business, financial condition or results of operations.

Note 10—Segment Information

Description of Segments

Mattel’s operating segments are separately managed business units and are divided on a geographic basis between domestic and international. On October 10, 2005, Mattel announced the consolidation of its domestic Mattel Girls & Boys Brands and Fisher-Price Brands divisions into one division. The creation of the “Mattel Brands” division, which resulted in the consolidation of some management and support functions, preserves the natural marketing and design groups that are empowered to create and market toys based on gender and age groups and is expected to more effectively and efficiently leverage Mattel’s scale. These changes are consistent with Mattel’s ongoing strategy to build brands, cut costs and develop people in a streamlined organization that is focused on scale, innovation and execution. There were no changes to Mattel’s operating segments as a result of the consolidation.

Mattel’s domestic operating segments include:

Mattel Girls & Boys Brands — including Barbie^® fashion dolls and accessories (“Barbie^®”), Polly Pocket!^™, Pixel Chix^™, Winx Club^™ and Disney Classics (collectively “Other Girls Brands”), Hot Wheels^®, Matchbox^® and Tyco^® R/C vehicles and playsets (collectively “Wheels”) and Batman^™, CARS^™, Superman^™, Radica:^® products and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands — including Fisher-Price^®, Little People^®, BabyGear^™ and View-Master^® (collectively “Core Fisher-Price^®”), Sesame Street^®, Dora the Explorer^™, Go-Diego-Go!^™, Winnie the Pooh, InteracTV^™ and See ‘N Say^® (collectively “Fisher-Price^® Friends”) and Power Wheels^®.

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American Girl Brands — including Just Like You^™, the historical collection and Bitty Baby^®. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers.

Additionally, the International segment sells products in all toy categories, except American Girl Brands.

Segment Data

The tables below present information about revenues, income and assets by segment. Mattel does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (referred to as “gross sales”). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to individual products. For this reason, Mattel’s chief operating decision maker uses gross sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income from operations based on the adjustments recorded in the financial accounting systems. Segment income from operations represents operating income, while consolidated income from operations represents income from operations before income taxes as reported in the consolidated statements of operations. The corporate and other category includes costs not allocated to individual segments, including charges related to incentive compensation and corporate headquarters functions managed on a worldwide basis and the impact of changes in foreign currency rates on intercompany transactions.

	For the Year
	2006			2005			2004
	(In thousands)
Revenues
Domestic:
Mattel Girls & Boys Brands US	$	1,507,493		$	1,364,922		$	1,511,550
Fisher-Price Brands US		1,471,604			1,358,562			1,319,200
American Girl Brands		439,970			436,085			379,112
Total Domestic		3,419,067			3,159,569			3,209,862
International		2,738,967			2,463,984			2,336,236
Gross sales		6,158,034			5,623,553			5,546,098
Sales adjustments		(507,878	)		(444,537	)		(443,312	)
Net sales	$	5,650,156		$	5,179,016		$	5,102,786
Segment Income
Domestic:
Mattel Girls & Boys Brands US	$	267,152		$	206,496		$	326,317
Fisher-Price Brands US		216,107			172,960			173,237
American Girl Brands		96,997			106,158			77,501
Total Domestic		580,256			485,614			577,055
International		419,097			316,153			299,224
		999,353			801,767			876,279
Corporate and other expense (a)		270,535			137,238			145,462
Operating income		728,818			664,529			730,817
Interest expense		79,853			76,490			77,764
Interest (income)		(30,468	)		(34,211	)		(19,683	)
Other non-operating (income), net		(4,323	)		(29,799	)		(23,518	)
Income before income taxes	$	683,756		$	652,049		$	696,254

(a) Corporate and other expense includes (i) incentive compensation expense of $108.5 million, $22.0 million, and $41.8 million for the years ended December 31, 2006, 2005, and 2004, respectively, (ii) $16.0 million, $7.1 million, and $16.2 million of charges related to severance for the years ended December 31, 2006, 2005, and 2004, respectively, and (iii) stock compensation expense of $27.5 million for the year ended December 31, 2006.

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	For the Year
	2006		2005		2004
	(In thousands)
Depreciation/Amortization
Domestic:
Mattel Girls & Boys Brands US	$	42,503	$	42,921	$	48,304
Fisher-Price Brands US		37,358		37,170		37,261
American Girl Brands		12,345		12,798		15,166
Total Domestic		92,206		92,889		100,731
International		55,212		58,594		59,125
		147,418		151,483		159,856
Corporate and other		24,846		23,508		22,622
Depreciation and amortization	$	172,264	$	174,991	$	182,478

Segment assets are comprised of accounts receivable and inventories, net of applicable reserves and allowances.

	December 31,
	2006		2005
	(In thousands)
Assets
Domestic:
Mattel Girls & Boys Brands US	$	296,533	$	255,817
Fisher-Price Brands US		217,124		188,076
American Girl Brands		61,014		60,256
Total Domestic		574,671		504,149
International		663,393		547,980
		1,238,064		1,052,129
Corporate and other		88,898		85,411
Accounts receivable and inventories, net	$	1,326,962	$	1,137,540

Mattel sells a broad variety of toy products, which are grouped into three major categories: Mattel Girls & Boys Brands, Fisher-Price Brands and American Girl Brands. The table below presents worldwide revenues by category:

	For the Year
	2006			2005			2004
	(In thousands)
Worldwide Revenues
Mattel Girls & Boys Brands	$	3,423,663		$	3,138,768		$	3,233,458
Fisher-Price Brands		2,269,430			2,023,858			1,920,164
American Girl Brands		439,970			436,085			379,112
Other		24,971			24,842			13,364
Gross sales		6,158,034			5,623,553			5,546,098
Sales adjustments		(507,878	)		(444,537	)		(443,312	)
Net sales	$	5,650,156		$	5,179,016		$	5,102,786

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Geographic Information

The tables below present information by geographic area. Revenues are attributed to countries based on location of customer. Long-lived assets principally include goodwill, property, plant and equipment, net and identifiable intangibles, net.

	For the Year
	2006			2005			2004
	(In thousands)
Revenues
United States	$	3,419,067		$	3,159,569		$	3,209,862
International:
Europe		1,544,541			1,408,653			1,410,525
Latin America		739,941			644,902			524,481
Asia Pacific		239,597			218,240			203,575
Other		214,888			192,189			197,655
Total International		2,738,967			2,463,984			2,336,236
Gross sales		6,158,034			5,623,553			5,546,098
Sales adjustments		(507,878	)		(444,537	)		(443,312	)
Net sales	$	5,650,156		$	5,179,016		$	5,102,786

	December 31,
	2006		2005
	(In thousands)
Long-Lived Assets
United States	$	1,030,772	$	934,476
International		571,806		529,423
Consolidated total	$	1,602,578	$	1,463,899

Major Customers

Sales to Mattel’s three largest customers accounted for 43%, 45% and 46% of worldwide consolidated net sales for 2006, 2005 and 2004, respectively, as follows (in billions):

	For the Year
	2006		2005		2004
Wal-Mart	$	1.1	$	1.0	$	1.0
Toys “R” Us		0.8		0.8		0.8
Target		0.5		0.5		0.5

The Mattel Girls & Boys Brands US and Fisher-Price Brands US segments sell products to each of Mattel’s three largest customers. The International segment sells products to Wal-Mart and Toys “R” Us. The American Girl Brands segment sells its children’s publications to Wal-Mart and Target.

97

Note 11—Supplemental Financial Information

	December 31,
	2006			2005
	(In thousands)
Inventories include the following:
Raw materials and work in process	$	45,470		$	34,038
Finished goods		337,679			342,859
	$	383,149		$	376,897
Property, plant and equipment, net include the following:
Land	$	39,445		$	29,125
Buildings		227,935			231,597
Machinery and equipment		759,467			736,041
Tools, dies and molds		537,463			557,133
Capital leases		23,271			23,271
Leasehold improvements		128,668			115,496
		1,716,249			1,692,663
Less: accumulated depreciation		(1,179,500	)		(1,145,559	)
	$	536,749		$	547,104
Other noncurrent assets include the following:
Deferred income taxes	$	503,168		$	495,914
Identifiable intangibles (net of amortization of $42.7 million and $38.8 million in 2006 and 2005, respectively)		70,593			20,422
Other		149,912			178,304
	$	723,673		$	694,640
Accrued liabilities include the following:
Receivable collections due to bank	$	245,545		$	200,417
Royalties		125,581			106,257
Incentive compensation		93,246			22,555
Advertising and promotion		76,799			75,113
Other		439,264			392,131
	$	980,435		$	796,473
Other noncurrent liabilities include the following:
Benefit plan liabilities	$	176,584		$	165,637
Other		128,092			116,758
	$	304,676		$	282,395

	For the Year
	2006			2005			2004
	(In thousands)
Currency transaction (gains)/losses included in:
Operating income	$	(32,008	)	$	(57,356	)	$	(56,667	)
Other non-operating expense (income), net		(1,652	)		3,120			(2,168	)
Net transaction (gains)	$	(33,660	)	$	(54,236	)	$	(58,835	)
Other selling and administrative expenses include the following:
Design and development	$	173,514		$	182,015		$	171,337
Bad debt expense		3,399			3,108			7,659
Identifiable intangible asset amortization		3,906			2,315			2,622

98

Note 12—Acquisition

On October 3, 2006, Mattel completed its acquisition of Radica for net cash paid of $196.4 million, which includes the purchase price and acquisition costs of $235.1 million, net of cash acquired of $38.7 million. Radica manufactures and markets a diverse line of electronic entertainment products including electronic games carrying the Radica:^®, 20Q^™, Cube World^™, and Play TV^® brand names and youth electronics carrying the Girl Tech^® brand name. Under the Agreement and Plan of Amalgamation (the “Amalgamation Agreement”) between Radica and certain of Mattel’s wholly owned subsidiaries, shareholders of Radica received $11.55 in cash for each share of Radica common stock at the effective time of the amalgamation. Mattel, Inc. is a party to the Amalgamation Agreement solely as a guarantor of the obligations of its subsidiaries under the Amalgamation Agreement. Mattel’s acquisition of Radica is intended to maximize and combine the core competencies of each company, as well as provide growth opportunities internationally and for existing brands like Barbie^®, Hot Wheels^®, and Fisher-Price^®.

Radica had net sales of $58.7 million from the date of acquisition to December 31, 2006, and its results of operations are included in the 2006 consolidated financial statements following the date of acquisition. Radica’s results of operations are not material to Mattel and, therefore, pro-forma results of operations for 2006 and 2005 have not been provided. The following table summarizes the balance sheet of Radica as of the acquisition date based on the estimated fair values of the assets acquired and liabilities assumed:

	October 3, 2006
	(In thousands)
Cash and equivalents	$	38,698
Accounts receivable		33,226
Inventories		35,309
Property, plant and equipment		17,647
Goodwill		107,584
Identifiable intangible assets		54,200
Other assets		9,764
Total assets	$	296,428
Liabilities	$	61,365
Equity		235,063
Total liabilities and equity	$	296,428

99

Note 13—Quarterly Financial Information (Unaudited)

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
	(In thousands, except per share amounts)
Year Ended December 31, 2006
Net sales	$	793,347		$	957,655		$	1,790,312	$	2,108,842
Gross profit		331,958			416,120			851,369		1,012,346
Advertising and promotion expenses		88,853			100,554			205,886		255,682
Other selling and administrative expenses (a)		275,096			265,655			323,248		368,001
Operating (loss) income		(31,991	)		49,911			322,235		388,663
Income (loss) before income taxes		(36,495	)		42,354			304,553		373,344
Net income (b)	$	30,170		$	37,380		$	239,025	$	286,352
Net income per common share—basic	$	0.08		$	0.10		$	0.63	$	0.76
Weighted average number of common shares		388,766			386,191			378,628		378,261
Net income per common share—diluted	$	0.08		$	0.10		$	0.62	$	0.75
Weighted average number of common and common equivalent shares		391,287			388,777			382,664		384,008
Dividends declared per common share	$	—		$	—		$	—	$	0.65
Common stock market price:
High	$	18.13		$	17.57		$	19.79	$	23.80
Low		14.78			15.94			15.88		19.44
Year Ended December 31, 2005
Net sales	$	783,120		$	886,823		$	1,666,145	$	1,842,928
Gross profit		344,060			386,817			761,257		880,734
Advertising and promotion expenses		87,709			93,116			191,607		256,683
Other selling and administrative expenses		250,822			265,176			260,850		302,376
Operating income		5,529			28,525			308,800		321,675
Income before income taxes		8,948			26,006			311,339		305,756
Net income (loss) (c)	$	6,507		$	(93,987	)	$	225,339	$	279,160
Net income (loss) per common share—basic	$	0.02		$	(0.23	)	$	0.56	$	0.70
Weighted average number of common shares		416,096			409,769			403,743		400,213
Net income (loss) per common share—diluted	$	0.02		$	(0.23	)	$	0.55	$	0.69
Weighted average number of common and common equivalent shares		421,105			409,769			407,222		402,507
Dividends declared per common share	$	—		$	—		$	—	$	0.50
Common stock market price:
High	$	21.42		$	21.00		$	19.45	$	17.00
Low		18.35			17.60			16.39		14.53

(a) Other selling and administrative expenses for the third quarter of 2006 included stock compensation expense of $19.3 million related to the correction of prior period unintentional accounting errors.

(b) Net income for the year ended December 31, 2006 was favorably impacted by income tax benefits of $56.8 million as a result of settlements with foreign tax authorities in the first quarter of 2006, and $6.2 million in the second quarter of 2006 related to a settlement with a state tax authority for tax years 1997 and 1998.

(c) Net income for the year ended December 31, 2005 was impacted by an incremental income tax expense of $112.9 million in the second quarter of 2005, and a reduction to income tax expense of $5.9 million in the fourth quarter of 2005 related to the repatriation of unremitted foreign earnings under the Jobs Act. Additionally, net income in the fourth quarter of 2005 was impacted by a $38.6 million income tax benefit primarily related to audit settlements with certain tax authorities in both the US and abroad.

100

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of December 31, 2006, Mattel’s disclosure controls and procedures were evaluated to provide reasonable assurance that information required to be disclosed by Mattel in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to management, as appropriate, in a timely manner that would alert them to material information relating to Mattel that would be required to be included in Mattel’s periodic reports and to provide reasonable assurance that such information was recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Based on this evaluation, Robert A. Eckert, Mattel’s principal executive officer, and Kevin M. Farr, Mattel’s principal financial officer, concluded that these disclosure controls and procedures were effective as of December 31, 2006.

Management’s Report on Internal Control over Financial Reporting

See Item 8 “Financial Statements and Supplementary Data--Management’s Report on Internal Control over Financial Reporting.”

Changes in Internal Control Over Financial Reporting

Mattel continues to implement a conversion to new and upgraded financial and human resources information technology systems that began in the fourth quarter of 2002. Mattel has evaluated the effect on its internal control over financial reporting of this conversion and determined that this conversion has not materially affected, and is not reasonably likely to materially affect, Mattel’s internal control over financial reporting. Mattel has not made any significant changes to its internal control over financial reporting or in other factors that could significantly affect these controls subsequent to December 31, 2006.

Item 9B. Other Information.

None.

101

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required under this Item is incorporated herein by reference to Mattel’s 2007 Notice of Annual Meeting of Stockholders and Proxy Statement to be filed with the SEC within 120 days after December 31, 2006. Information with respect to the executive officers of Mattel appears under the heading “Executive Officers of the Registrant” in Part I herein. Mattel has adopted the Mattel Code of Conduct (the “Code of Conduct”) applicable to all directors, officers and employees which includes its general comprehensive code of ethical business conduct as well as provisions related to accounting and financial matters applicable to the Chief Executive Officer, Chief Financial Officer, Corporate Controller and other finance organization employees (the “finance code of ethics”). The Code of Conduct is publicly available on Mattel’s corporate website at http://www.mattel.com. A copy may also be obtained free of charge by mailing a request in writing to: Secretary, Mail Stop M1-1516, Mattel, Inc., 333 Continental Blvd., El Segundo, California 90245-5012. If Mattel makes any substantive amendments to the Code of Conduct or the finance code of ethics, or grants any waiver, including any implicit waiver from a provision of the Code of Conduct for any executive officer or director, or the finance code of ethics for the Chief Executive Officer, Chief Financial Officer or Corporate Controller, Mattel will disclose the nature of such amendment or waiver on its corporate website or in a Current Report on Form 8-K. Mattel has posted the Board of Directors’ corporate governance guidelines and the charters of its Audit, Compensation and Governance and Social Responsibility Committees of the Board of Directors on its corporate website at http://www.mattel.com. Copies of the corporate governance guidelines and committee charters may be obtained free of charge by mailing a request to the address noted above.

Mattel has filed the certification of its Chief Executive Officer with the New York Stock Exchange (“NYSE”) for 2006 as required pursuant to Section 303A.12(a) of the NYSE Listed Company Manual. In addition, Mattel has filed the Sarbanes-Oxley Act Section 302 certifications of its Chief Executive Officer and Chief Financial Officer with the Securities and Exchange Commission, which are attached hereto as Exhibit 31.0 and Exhibit 31.1, respectively.

Item 11. Executive Compensation.

The information required under this Item is incorporated herein by reference to Mattel’s 2007 Notice of Annual Meeting of Stockholders and Proxy Statement to be filed with the SEC within 120 days after December 31, 2006.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required under this Item is incorporated herein by reference to Mattel’s 2007 Notice of Annual Meeting of Stockholders and Proxy Statement to be filed with the SEC within 120 days after December 31, 2006.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required under this Item is incorporated herein by reference to Mattel’s 2007 Notice of Annual Meeting of Stockholders and Proxy Statement to be filed with the SEC within 120 days after December 31, 2006.

Item 14. Principal Accountant Fees and Services.

The information required under this Item is incorporated herein by reference to Mattel’s 2007 Notice of Annual Meeting of Stockholders and Proxy Statement to be filed with the SEC within 120 days after December 31, 2006.

102

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report:

1. Financial Statements

The following financial statements are filed as part of this report under Item 8 “Financial Statements and Supplementary Data.”

	Page
Management’s Report on Internal Control over Financial Reporting	56
Report of Independent Registered Public Accounting Firm	57
Consolidated Balance Sheets as of December 31, 2006 and 2005	59
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004	60
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004	61
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004	62
Notes to Consolidated Financial Statements	63

2. Financial Statement Schedules for the years ended December 31, 2006, 2005 and 2004

Schedule II—Valuation and Qualifying Accounts and Allowances

All other Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. See Item 8 “Financial Statements and Supplementary Data.”

3. Exhibits (Listed by numbers corresponding to Item 601 of Regulation S-K)

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
3.0	Restated Certificate of Incorporation of Mattel	10-K	001-05647	3.0	March 28, 2001
3.1	Certificate of Amendment of Restated Certificate of Incorporation of Mattel	10-K	001-05647	3.1	March 28, 2002
3.2	Certificate of Amendment of Restated Certificate of Incorporation of Mattel	DEF 14A	001-05647	B	March 26, 1998
3.3	Amended and Restated Bylaws of Mattel	8-K	001-05647	99.0	September 21, 2006
4.0	Specimen Stock Certificate with respect to Mattel’s Common Stock	10-K	001-05647	4.0	March 28, 2002
4.1	Indenture, dated as of February 15, 1996, between Mattel and Chase Manhattan Bank and Trust Company, National Association, formerly Chemical Trust Company of California, as Trustee	10-K	001-05647	4.1	March 28, 2002

103

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
4.2	Indenture, dated as of February 15, 1996, between Mattel and Chemical Trust Company of California (now known as J. P. Morgan Trust Company, National Association) relating to Senior Debt Securities	S-3ASR	333-134740	4.1	June 5, 2006
4.3	Form of Indenture between Mattel and J. P. Morgan Trust Company, National Association, relating to Subordinated Debt Securities	S-3ASR	333-134740	4.2	June 5, 2006
4.4	Underwriting Agreement dated June 8, 2006, between Mattel and Banc of America Securities LLC and Citigroup Global Markets Inc.	8-K	001-05647	1.1	June 12, 2006
4.5	Form of Floating Rate Notes due June 15, 2009	8-K	001-05647	4.1	June 12, 2006
4.6	Form of 6.125% Notes due June 15, 2011	8-K	001-05647	4.2	June 12, 2006
10.0	Third Amended and Restated Credit Agreement dated as of March 23, 2005, among Mattel, Inc., as Borrower, Bank of America, N.A. as Administrative Agent, and the financial institutions party thereto	8-K	001-05647	99.0	March 29, 2005
10.1	First Amended and Restated Receivables Purchase Agreement dated as of March 20, 2002 among Mattel Factoring, Inc., as Transferor, Mattel, Inc., as Servicer, Bank of America, N.A., as Administrative Agent, and the financial institutions thereto	10-K	001-05647	10.1	March 28, 2002
10.2	Amendment No. 1 to First Amended and Restated Receivables Purchase Agreement dated as of March 19, 2004, among Mattel Factoring, Inc., as Transferor, Mattel, Inc., as Servicer, Bank of America, N.A., as Administrative Agent, and the financial institutions party thereto	10-Q	001-05647	99.1	May 7, 2004

104

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.3	Amendment No. 2 to First Amended and Restated Receivables Purchase Agreement dated as of March 23, 2005, among Mattel Factoring, Inc., as Transferor, Mattel, Inc., as Servicer, Bank of America, N.A., as Administrative Agent, and the financial institutions party thereto	8-K	001-05647	99.1	March 29, 2005
10.4	Credit Agreement dated as of December 9, 2005, among Mattel Asia Pacific Sourcing Limited, as Borrower, Mattel, Inc., Bank of America, N.A., as Administrative Agent, and the financial institutions party thereto	8-K	001-05647	99.1	December 15, 2005
10.5	Continuing Guaranty Agreement dated as of December 9, 2005, by Mattel, Inc., as Guarantor, to Bank of America, N.A., as Administrative Agent	8-K	001-05647	99.2	December 15, 2005
10.6	Distribution Agreement dated November 12, 1997 among Mattel, Morgan Stanley & Co. Incorporated and Credit Suisse First Boston Corporation	10-K	001-05647	10.2	March 24, 2003
10.7	Master Agreement for the Transfer of Receivables dated 30th November, 2001 among Societe Generale Bank Nederland N.V., Mattel International Holdings B.V. as Depositor and Mattel France S.A. and Mattel GmbH as the Sellers	10-K	001-05647	10.6	March 28, 2002
10.8	Amendment to Master Agreement for the Transfer of Receivables dated December 20, 2001 among Societe Generale Bank Nederland N.V., Mattel International Holdings B.V., Mattel France S.A. and Mattel GmbH	10-K	001-05647	10.7	March 28, 2002
10.9	Amendment to Master Agreement for the Transfer of Receivables dated July 1, 2002 among Societe Generale Bank Nederland, Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH	10-Q	001-05647	99.3	August 9, 2002

105

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.10	Amendment to Master Agreement for the Transfer of Receivables dated July 29, 2003 among Societe Generale Bank Nederland N.V., Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH	10-Q	001-05647	99.0	August 14, 2003
10.11	Amendment to Master Agreement for the Transfer of Receivables dated July 12, 2004 among Societe Generale Bank Nederland N.V., Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH	10-Q	001-05647	99.0	August 6, 2004
10.12	Letter Agreement Regarding Master Agreement for the Transfer of Receivables among Societe Generale Bank Nederland N.V., Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH	10-Q	001-05647	99.2	November 8, 2004
10.13	Amendment to Master Agreement for the Transfer of Receivables dated June 14, 2005 among Societe Generale Bank Nederland N.V., Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH	8-K	001-05647	99.0	June 24, 2005
10.14	Amendment to Master Agreement for the Transfer of Receivables dated July 1, 2005 among Societe Generale Bank Nederland N.V., Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH	8-K	001-05647	99.0	July 8, 2005
10.15	Termination agreement with Societe Generale Bank Nederland N.V.	8-K	001-05647	99.0	February 9, 2007
Executive Compensation Plans and Arrangements of Mattel
10.16	Form of Indemnity Agreement between Mattel and its directors and certain of its executive officers	10-K	001-05647	10.9	March 28, 2001
10.17	Executive Employment Agreement dated October 18, 2000 between Mattel and Robert A. Eckert	10-K	001-05647	10.10	March 28, 2001
10.18	Amendment to Executive Employment Agreement between Mattel and Robert A. Eckert dated March 8, 2005	8-K	001-05647	99.7	March 18, 2005

106

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.19	Letter Agreement between Mattel and Robert A. Eckert entered into on April 4, 2005 regarding the Mattel, Inc. 2005 Supplemental Executive Retirement Plan	8-K	001-05647	99.1	April 8, 2005
10.20	Executive Employment Agreement dated January 31, 2000 between Mattel and Neil B. Friedman	10-K	001-05647	10.12	March 10, 2000
10.21	Amendment to Employment Agreement dated November 14, 2000 between Mattel and Neil B. Friedman	10-K	001-05647	10.29	March 28, 2001
10.22	Amendment to Employment Agreement and Stock Option Grant Agreements between Mattel and Neil B. Friedman dated February 10, 2000	10-K	001-05647	10.14	March 10, 2000
10.23	Letter agreement between Mattel and Neil B. Friedman entered into on April 4, 2005 regarding the Mattel, Inc. 2005 Supplemental Executive Retirement Plan	8-K	001-05647	99.5	April 8, 2005
10.24	Amended and Restated Executive Employment Agreement dated March 28, 2000 between Mattel and Kevin M. Farr	10-K	001-05647	10.33	March 28, 2001
10.25	Amendment to Employment Agreement and Stock Option Grant Agreements dated July 20, 2000 between Mattel and Kevin M. Farr	10-K	001-05647	10.34	March 28, 2001
10.26	Amendment to Employment Agreement dated March 6, 2002 between Mattel and Kevin M. Farr	10-K	001-05647	10.30	March 28, 2002
10.27	Letter agreement between Mattel and Kevin M. Farr entered into on April 4, 2005 regarding the Mattel, Inc. 2005 Supplemental Executive Retirement Plan	8-K	001-05647	99.4	April 8, 2005
10.28	Executive Employment Agreement dated November 13, 2000 between Mattel and Thomas A. Debrowski	10-K	001-05647	10.24	March 8, 2005
10.29	Letter agreement between Mattel and Thomas A. Debrowski entered into on April 4, 2005 regarding the Mattel, Inc. 2005 Supplemental Executive Retirement Plan	8-K	001-05647	99.3	April 8, 2005

107

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.30	Letter agreement between Mattel and Thomas A. Debrowski dated October 11, 2005, entered into October 12, 2005, amending Mr. Debrowski’s employment agreement	8-K	001-05647	99.2	October 14, 2005
10.31	Employment letter dated August 22, 2000 between Mattel and Bryan G. Stockton	10-K	001-05647	10.26	March 12, 2004
10.32	Letter agreement between Mattel and Bryan G. Stockton entered into on March 28, 2005, regarding the Mattel, Inc. 2005 Supplemental Executive Retirement Plan	10-K	001-05647	10.31	February 27, 2006
10.33	2002 Mattel Incentive Plan	DEF 14A	001-05647	Appendix A	April 11, 2002
10.34	Mattel, Inc. 2003 Long-Term Incentive Plan	DEF 14A	001-05647	Appendix A	April 2, 2003
10.35	Amendment No.1 to Mattel, Inc. 2003 Long-Term Incentive Plan	8-K	001-05647	99.1	March 18, 2005
10.36	Mattel, Inc. Deferred Compensation and PIP Excess Plan	S-8	333-89458	4.1	May 31, 2002
10.37	Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors	10-K	001-05647	10.12	March 31, 1999
10.38	Amendment No. 1 to Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors	10-K	001-05647	10.43	March 28, 2001
10.39	Mattel, Inc. Amended & Restated Supplemental Executive Retirement Plan as of May 1, 1996	10-K	001-05647	10.37	March 28, 2002
10.40	Amendment No. 1 to Mattel, Inc. Amended & Restated Supplemental Executive Retirement Plan	10-K	001-05647	10.22	March 10, 2000
10.41	Mattel, Inc. 2005 Supplemental Executive Retirement Plan	8-K	001-05647	99.4	March 18, 2005
10.42	The Fisher-Price Pension Plan (1994 Restatement)	10-K	001-05647	10.41	March 28, 2002
10.43	Fifth Amendment to the Fisher-Price Pension Plan	10-K	001-05647	10.49	March 28, 2001
10.44	Sixth Amendment to the Fisher-Price Pension Plan	10-K	001-05647	10.43	March 28, 2002
10.45	Seventh Amendment to the Fisher-Price Pension Plan	10-K	001-05647	10.36	March 12, 2004

108

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.46	Eighth Amendment to the Fisher-Price Pension Plan	10-K	001-05647	10.37	March 12, 2004
10.47	Ninth Amendment to the Fisher-Price Pension Plan	10-K	001-05647	10.48	February 27, 2006
10.48*	Tenth Amendment to the Fisher-Price Pension Plan
10.49	The Fisher-Price Section 415 Excess Benefit Plan	10	001-05647	10(n)	June 28, 1991
10.50*	Mattel, Inc. Personal Investment Plan, January 1, 2006 Restatement
10.51	Mattel, Inc. Amended and Restated 1990 Stock Option Plan (the “1990 Plan”)	10-K	001-05647	10.49	March 28, 2002
10.52	Amendment No. 1 to the 1990 Plan	S-4	33-50749	F-1	October 25, 1993
10.53	Amendment No. 2 to the 1990 Plan	10-K	001-05647	10.57	March 28, 2001
10.54	Amendment No. 3 to the 1990 Plan	10-K	001-05647	10.34	March 10, 2000
10.55	Amendment No. 4 to the 1990 Plan	10-Q	001-05647	99.0	May 3, 2000
10.56	Form of First Amendment to Award Agreement under the 1990 Plan	10-K	001-05647	10.60	March 28, 2001
10.57	Notice of Grant of Stock Options and Grant Agreement under the 1990 Plan	10-K	001-05647	10.61	March 28, 2001
10.58	Grant Agreement for a Non-Qualified Stock Option under the 1990 Plan	10-K	001-05647	10.62	March 28, 2001
10.59	Award Cancellation Agreement under the 1990 Plan	10-K	001-05647	10.63	March 28, 2001
10.60	Amended and Restated Mattel, Inc. 1996 Stock Option Plan (the “1996 Plan”)	10-K	001-05647	10.58	March 28, 2002
10.61	Amendment to the 1996 Plan	S-8	333-75145	4.2	March 26, 1999
10.62	Amendment No. 2 to the 1996 Plan	10-K	001-05647	10.42	March 10, 2000
10.63	Amendment No. 3 to the 1996 Plan	10-Q	001-05647	99.1	May 3, 2000
10.64	Amendment No. 4 to the 1996 Plan	10-K	001-05647	10.68	March 28, 2001
10.65	Amendment No. 5 to the 1996 Plan	10-Q	001-05647	99.1	October 26, 2001
10.66	Amendment to the 1996 Plan	10-K	001-05647	10.64	March 28, 2002
10.67	Amendment No. 6 to the 1996 Plan	10-Q	001-05647	99.0	August 9, 2002
10.68	Amendment No. 7 to the 1996 Plan	10-Q	001-05647	99.0	November 12, 2002

109

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.69	Form of Option Grant Agreement for Outside Directors (Initial Grant) under the 1996 Plan, as amended	10-Q	001-05647	99.1	August 14, 2003
10.70	Form of Option Grant Agreement for Outside Directors (Annual Grant) under the 1996 Plan, as amended	10-Q	001-05647	99.2	August 14, 2003
10.71	Form of Option Grant Agreement (Three Year Vesting) under the 1996 Plan, as amended	10-Q	001-05647	99.3	August 14, 2003
10.72	Form of Grant Agreement for a Restricted Stock Grant under the Mattel, Inc. 1996 Stock Option Plan	8-K	001-05647	99.6	March 18, 2005
10.73	Mattel, Inc. 1997 Premium Price Stock Option Plan (the “1997 Plan”)	DEF 14A	001-05647	A	March 26, 1998
10.74	First Amendment to the 1997 Plan	10-Q	001-05647	10.00	July 21, 1998
10.75	Second Amendment to the 1997 Plan	10-K	001-05647	10.26	March 31, 1999
10.76	Amendment No. 3 to the 1997 Plan	10-K	001-05647	10.48	March 10, 2000
10.77	Amendment No. 4 to the 1997 Plan	10-K	001-05647	10.75	March 28, 2001
10.78	Amendment No. 5 to the 1997 Plan	10-Q	001-05647	99.1	August 9, 2002
10.79	Form of Option and TLSAR Agreement under the 1997 Plan (25% Premium Grant), as amended	10-Q	001-05647	10.1	July 21, 1998
10.80	Form of Option and TLSAR Agreement under the 1997 Plan (33 1/3 % Premium Grant), as amended	10-Q	001-05647	10.2	July 21, 1998
10.81	Mattel 1999 Stock Option Plan (the “1999 Plan”)	10-K	001-05647	10.51	March 10, 2000
10.82	Amendment No. 1 to the 1999 Plan	10-Q	001-05647	99.2	May 3, 2000
10.83	Amendment No. 2 to the 1999 Plan	10-K	001-05647	10.80	March 28, 2001
10.84	Amendment No. 3 to the 1999 Plan	10-Q	001-05647	99.2	August 9, 2002
10.85	Form of Option Grant Agreement (Three Year Vesting) under the 1999 Plan, as amended	10-K	001-05647	10.77	March 12, 2004
10.86	Mattel, Inc. 2005 Equity Compensation Plan (“the 2005 Plan”)	DEF 14A	001-05647	Appendix C	April 13, 2005
10.87	Form of Grant Agreement for August 1, 2005 grants to employees of Non-Qualified Stock Options (“NQSOs”) under the 2005 Plan	8-K	001-05647	99.1	August 5, 2005

110

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.88	Form of Grant Agreement for August 1, 2006 grants to employees of NQSOs under the 2005 Plan	8-K	001-05647	99.0	August 4, 2006
10.89	Form of Grant Agreement for August 1, 2006 grants to employees of Restricted Stock Units with Dividend Equivalents (“RSUs”) under the 2005 Plan	8-K	001-05647	99.5	August 4, 2006
10.90	Form of Grant Agreement for August 1, 2005 grant to Robert A. Eckert of NQSOs under the 2005 Plan	8-K	001-05647	99.2	August 5, 2005
10.91	Form of Grant Agreement for August 1, 2006 grant to Robert A. Eckert of NQSOs under the 2005 Plan	8-K	001-05647	99.1	August 4, 2006
10.92	Form of Grant Agreement for August 1, 2006 grant to Robert A. Eckert of RSUs under the 2005 Plan	8-K	001-05647	99.6	August 4, 2006
10.93	Form of Grant Agreement for August 1, 2005 grant to Thomas A. Debrowski of NQSOs under the 2005 Plan	8-K	001-05647	99.4	August 5, 2005
10.94	Form of Grant Agreement for August 1, 2006 grant to Thomas A. Debrowski of NQSOs under the 2005 Plan	8-K	001-05647	99.2	August 4, 2006
10.95	Form of Grant Agreement for August 1, 2005 grant to Kevin M. Farr of NQSOs under the 2005 Plan	8-K	001-05647	99.5	August 5, 2005
10.96	Form of Grant Agreement for August 1, 2006 grant to Kevin M. Farr of NQSOs under the 2005 Plan	8-K	001-05647	99.3	August 4, 2006
10.97	Form of Grant Agreement for August 1, 2005 grant to Neil B. Friedman of NQSOs under the 2005 Plan	8-K	001-05647	99.6	August 5, 2005
10.98	Form of Grant Agreement for August 1, 2006 grant to Neil B. Friedman of NQSOs under the 2005 Plan	8-K	001-05647	99.4	August 4, 2006
10.99	Form of Grant Agreement for October 18, 2005 grant to Neil B. Friedman of RSUs under the 2005 Plan	8-K	001-05647	99.1	October 14, 2005

111

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
10.100	Form of Amendment to Grant Agreement for October 18, 2005 grant to Neil B. Friedman of RSUs under the 2005 Plan	8-K	001-05647	99.4	May 12, 2006
10.101	Form of Grant Agreement for Initial Grants to Outside Director of NQSOs under the 2005 Plan	8-K	001-05647	99.1	March 17, 2006
10.102	Form of Grant Agreement as of March 16, 2006 for Initial Grant to Outside Director of RSUs under the 2005 Plan	8-K	001-05647	99.0	May 3, 2006
10.103	Form of Grant Agreement as of September 15, 2006 for Initial Grant to Outside Director of RSUs under the 2005 Plan	8-K	001-05647	99.0	August 2, 2006
10.104	Form of Grant Agreement for May 19, 2005 Annual Grants to Outside Directors of NQSOs under the 2005 Plan	10-Q	001-05647	99.0	August 3, 2005
10.105	Form of Grant Agreement for May 19, 2005 Annual Grants to Outside Directors of RSUs under the 2005 Plan	10-Q	001-05647	99.1	August 3, 2005
10.106	Form of Amendment to Grant Agreement for May 19, 2005 Annual Grants to Outside Directors of RSUs under the 2005 Plan	8-K	001-05647	99.3	May 12, 2006
10.107	Form of Grant Agreement for May 11, 2006 Annual Grants to Outside Directors of NQSOs under the 2005 Plan	8-K	001-05647	99.1	May 12, 2006
10.108	Form of Grant Agreement for May 11, 2006 Annual Grants to Outside Directors of RSUs under the 2005 Plan	8-K	001-05647	99.2	May 12, 2006
10.109*	Mattel, Inc. Key Executive Life Insurance Plan (for Robert A. Eckert)
10.110	Mattel, Inc. Summary of Compensation of the Non-Employee Members of the Board of Directors	8-K	001-05647	99.2	March 18, 2005
11.0*	Computation of Income per Common and Common Equivalent Share
12.0*	Computation of Earnings to Fixed Charges
21.0*	Subsidiaries of the Registrant as of December 31, 2006

112

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date
23.0*	Consent of Independent Registered Public Accounting Firm
24.0*	Power of Attorney (on page 114 of Form 10-K)
31.0*	Certification of Principal Executive Officer dated February 26, 2007 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1*	Certification of Principal Financial Officer dated February 26, 2007 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.0**	Certification of Principal Executive Officer and Principal Financial Officer dated February 26, 2007, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

* Filed herewith.

** Furnished herewith.

(1) This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Exchange Act.

Mattel has not filed certain long-term debt instruments under which the principal amount of securities authorized to be issued does not exceed 10% of its total assets. Copies of such agreements will be provided to the SEC upon request.

(b)   Exhibits Required by Item 601 of Regulation S-K

See Item (3) above.

(c)  Financial Statement Schedule

See Item (2) above.

Copies of this Annual Report on Form 10-K (including Exhibit 24.0) and Exhibits 11.0, 12.0, 21.0, 23.0, 31.0, 31.1 and 32.0 are available to stockholders of Mattel without charge. Copies of other exhibits can be obtained by stockholders of Mattel upon payment of twelve cents per page for such exhibits. Written requests should be sent to: Secretary, Mail Stop M1-1516, Mattel, Inc., 333 Continental Blvd., El Segundo, California 90245-5012.

113

SIGNATURE

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

MATTEL, INC. Registrant
By:	/s/    KEVIN M. FARR
	Kevin M. Farr Chief Financial Officer

Date: February 26, 2007

POWER OF ATTORNEY

We, the undersigned directors and officers of Mattel, Inc. do hereby severally constitute and appoint Robert A. Eckert, Robert Normile, Norman Gholson, and John L. Vogelstein, and each of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or any of them, may deem necessary or advisable to enable said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically, but without limitation, power and authority to sign for us or any of us, in our names in the capacities indicated below, any and all amendments hereto; and we do each hereby ratify and confirm all that said attorneys and agents, or any one of them, shall do or cause to be done by virtue hereof.

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

Signature	Title	Date
/S/    ROBERT A. ECKERT         Robert A. Eckert	Chairman of the Board and Chief Executive Officer (principal executive officer)	February 26, 2007
/S/    KEVIN M. FARR         Kevin M. Farr	Chief Financial Officer (principal financial officer)	February 26, 2007
/s/    H. SCOTT TOPHAM         H. Scott Topham	Senior Vice President and Corporate Controller (principal accounting officer)	February 26, 2007
/s/    EUGENE P. BEARD         Eugene P. Beard	Director	February 26, 2007
/s/    MICHAEL J. DOLAN         Michael J. Dolan	Director	February 26, 2007

114

Signature	Title	Date
/s/    TULLY M. FRIEDMAN         Tully M. Friedman	Director	February 26, 2007
/s/    DR. FRANCES D. FERGUSSON          Dr. Frances D. Fergusson	Director	February 26, 2007
/s/    DOMINIC NG         Dominic Ng	Director	February 26, 2007
/s/    ANDREA L. RICH         Andrea L. Rich	Director	February 26, 2007
/s/    RONALD L. SARGENT         Ronald L. Sargent	Director	February 26, 2007
/s/    CHRISTOPHER A. SINCLAIR         Christopher A. Sinclair	Director	February 26, 2007
/s/    G. CRAIG SULLIVAN         G. Craig Sullivan	Director	February 26, 2007
/s/    JOHN L. VOGELSTEIN         John L. Vogelstein	Director	February 26, 2007
/s/    KATHY BRITTAIN WHITE         Kathy Brittain White	Director	February 26, 2007

115

SCHEDULE II

MATTEL, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES

	Balance at Beginning of Year		Additions Charged to Operations		Net Deductions			Balance at End of Year
	(In thousands)
Allowance for Doubtful Accounts
Year ended December 31, 2006	$	24,577	$	3,399	$	(8,574	)(a)	$	19,402
Year ended December 31, 2005		32,831		3,108		(11,362	)(a)		24,577
Year ended December 31, 2004		27,451		7,659		(2,279	)(a)		32,831
Allowance for Inventory Obsolescence
Year ended December 31, 2006	$	60,535	$	22,953	$	(40,225	)(b)	$	43,263
Year ended December 31, 2005		65,231		27,574		(32,270	)(b)		60,535
Year ended December 31, 2004		53,647		35,437		(23,853	)(b)		65,231
Income Tax Valuation Allowances
Year ended December 31, 2006	$	201,809	$	12,564	$	(28,914	)(c)	$	185,459
Year ended December 31, 2005		205,277		16,249		(19,717	)(c)		201,809
Year ended December 31, 2004		208,878		25,745		(29,346	)(c)		205,277

(a) Includes writeoffs, recoveries of previous writeoffs, and currency translation adjustments.

(b) Primarily represents relief of previously established reserves resulting from the disposal of related inventory, raw materials, write-downs and currency translation adjustments.

(c) Primarily represents utilization of loss carryforwards.

EX-10.48

EXHIBIT 10.48

TENTH AMENDMENT TO

THE FISHER-PRICE PENSION PLAN

WHEREAS, Mattel, Inc. (“Mattel”) sponsors the Fisher-Price Pension Plan for the benefit of eligible employees of Fisher-Price, Inc. and certain other subsidiaries; and

WHEREAS, the provisions of the Plan are set forth in a 1994 Restatement, as amended; and

WHEREAS, Mattel desires to amend the Plan to provide for retroactive annuity start dates in accordance with Treasury Regulation Section 1.417(e)-1(b)(3); and

WHEREAS, in Section 9.1 of the Plan, Mattel reserved the right to amend the Plan at any time in whole or in part;

NOW, THEREFORE, to effect the foregoing, Mattel does hereby declare that the Plan be, and hereby is, amended as follows:

1. Effective as of January 1, 2006, the following new Section 4.6 shall be added to the end of Article 4 of the Plan:

“Section 4.6. Retroactive Annuity Starting Dates. A Participant may elect to receive payment of benefits pursuant to Section 4.1, 4.2 or 4.3 effective as of a date that occurs before the date the Participant receives the written explanation described in Section 4.1(b) (a “Retroactive Annuity Start Date”); provided that, the Retroactive Annuity Start Date must be after the Participant’s Severance from Service Date and on or after the Participant’s normal retirement date. Any payment of benefits as of a Retroactive Annuity Start Date shall comply with the requirements of Treasury Regulation Section 1.417(e)-1(b)(3) including (i) the payment of interest on back payments from the Retroactive Annuity Start Date to the date benefit payments commence to be paid to the Participant (the “Benefit Commencement Date”), and (ii) the necessity for spousal consent to payment as of the Retroactive Annuity Start Date. Any interest paid in accordance with this Section shall be calculated using the applicable interest rate used to determine the present value of a Participant’s accrued monthly pension benefit under the Plan as of the Benefit Commencement Date as described in Section 5.4. Any benefit payments paid to a Participant that begin effective as of a date prior to a Member’s Benefit Commencement Date but after a Member receives the written explanation described in Section 4.1(b) shall not be treated as payments as of a Retroactive Annuity Start Date pursuant to this Section and shall not include the payment of interest nor be subject to the other requirements of Treasury Regulation Section 1.417(e)-1(b)(3) related to Retroactive Annuity Start Dates. The Plan Administrator may establish rules and procedures for the administration of benefit payments in accordance with this Section.”

2. Except as expressly or by necessary implication amended hereby, the Plan shall continue in full force and effect.

IN WITNESS WHEREOF, Mattel has caused this instrument to be executed by its duly authorized officer this 19 day of December, 2006.

MATTEL, INC.
By:	/s/ Alan Kaye
Name:	Alan Kaye
Title:	SVP – Human Resources

2

EX-10.50

EXHIBIT 10.50

MATTEL, INC.

PERSONAL INVESTMENT PLAN

Amended and restated effective as of January 1, 2006

TABLE OF CONTENTS

			Page
ARTICLE I GENERAL			1
	1.1	Plan Name.	1
	1.2	Plan Purpose.	1
	1.3	Effective Date.	1
	1.4	Plan Mergers.	1
ARTICLE II DEFINITIONS			3
	2.1	Accounts.	3
	2.2	Affiliated Company.	5
	2.3	After-Tax Contributions.	5
	2.4	Before-Tax Contributions.	6
	2.5	Beneficiary.	6
	2.6	Board of Directors.	6
	2.7	Code.	6
	2.8	Committee.	6
	2.9	Company.	6
	2.10	Company Contributions.	6
	2.11	Company Matching Contributions.	6
	2.12	Company Stock.	7
	2.13	Compensation.	7
	2.14	Deferral Limitation.	8
	2.15	Distributable Benefit.	8
	2.16	Early Retirement Date.	9
	2.17	Effective Date.	9
	2.18	Eligible Employee.	9
	2.19	Employee.	10
	2.20	Employment Commencement Date.	10
	2.21	ERISA.	11
	2.22	Fort Wayne Plan.	11
	2.23	F-P Savings Plan.	11
	2.24	Governance Committee.	11
	2.25	Highly Compensated Employee.	11
	2.26	Hour of Service.	13
	2.27	Investment Manager.	14
	2.28	Leased Employee.	14
	2.29	Murray Hourly Employee.	15
	2.30	Normal Retirement.	15
	2.31	Normal Retirement Date.	15
	2.32	Participant.	15
	2.33	Participation Commencement Date.	15
	2.34	Participating Company.	15
	2.35	Period of Severance.	16

i

	2.36	Plan.	16
	2.37	Plan Administrator.	16
	2.38	Plan Year.	16
	2.39	Pleasant Plan.	16
	2.40	PrintPaks Plan.	16
	2.41	Severance Date.	16
	2.42	Total and Permanent Disability.	17
	2.43	Trust or Trust Fund.	17
	2.44	Trustee.	17
	2.45	Tyco Plan.	17
	2.46	Tyco Retirement Plan.	17
	2.47	Valuation Date.	18
	2.48	Year of Service.	18
ARTICLE III ELIGIBILITY AND PARTICIPATION			19
	3.1	Eligibility to Participate.	19
	3.2	Commencement of Participation.	20
	3.3	Historical Participation Dates.	20
	3.4	Former Participants in F-P Savings Plan.	20
	3.5	Former Participants in Tyco Plan.	20
	3.6	Former Participants in PrintPaks Plan.	21
	3.7	Former Participants in Pleasant Plan.	21
	3.8	Former Tyco Retirement Plan.	21
ARTICLE IV TRUST FUND			21
	4.1	Trust Fund.	21
ARTICLE V EMPLOYEE CONTRIBUTIONS			22
	5.1	Employee Contributions.	22
	5.2	Amount Subject to Election.	22
	5.3	Termination of, Change in Rate of, or Resumption of Deferrals.	23
	5.4	Limitation on Before-Tax Contributions by Highly Compensated Employees.	24
	5.5	Provisions for Disposition of Excess Before-Tax Contributions by Highly Compensated Employees.	27
	5.6	Provisions for Return of Annual Before-Tax Contributions in Excess of the Deferral Limitation.	29
	5.7	Character of Amounts Contributed as Before-Tax Contributions.	31
	5.8	Rollover Contributions.	31
	5.9	Transfer From Fisher-Price or Tyco.	32
ARTICLE VI COMPANY CONTRIBUTIONS			33
	6.1	General.	33
	6.2	Requirement for Net Profits.	34
	6.3	Special Limitations on After-Tax Contributions and Company Matching Contributions.	34

ii

	6.4	Provision for Return of Excess After-Tax Contributions and Company Matching Contributions on Behalf of Highly Compensated Employees.	37
	6.5	Forfeiture of Company Matching Contributions Attributable to Excess Deferrals or Contributions.	39
	6.6	Investment and Application of Plan Contributions.	39
	6.7	Irrevocability.	41
	6.8	Company, Committee and Trustee Not Responsible for Adequacy of Trust Fund.	41
ARTICLE VII PARTICIPANT ACCOUNTS AND ALLOCATIONS			42
	7.1	General.	42
	7.2	Participants’ Accounts.	42
	7.3	Revaluation of Participants’ Accounts.	42
	7.4	Treatment of Accounts Following Termination of Employment.	42
	7.5	Accounting Procedures.	43
ARTICLE VIII VESTING; PAYMENT OF PLAN BENEFITS			43
	8.1	Vesting.	43
	8.2	Distribution Upon Retirement.	45
	8.3	Distribution Upon Death Prior to Termination of Employment.	46
	8.4	Death After Termination of Employment.	47
	8.5	Termination of Employment.	47
	8.6	Withdrawals.	49
	8.7	Form of Distribution.	53
	8.8	Election for Direct Rollover of Distributable Benefit to Eligible Retirement Plan.	54
	8.9	Designation of Beneficiary.	56
	8.10	Facility of Payment.	57
	8.11	Requirement of Spousal Consent.	57
	8.12	Additional Documents.	57
	8.13	Company Stock Distribution.	58
	8.14	Valuation of Accounts.	58
	8.15	Forfeitures; Repayment.	60
	8.16	Loans.	60
	8.17	Special Rule for Disabled Employees.	63
	8.18	Election for Fully Vested Employees Transferred to Fisher-Price, Inc.	64
	8.19	Provision for Small Benefits.	65
	8.20	Special Provisions Applicable to Tyco Plan Accounts.	65
	8.21	Special Provisions Applicable to PrintPaks Plan Accounts.	66
	8.22	Special Provisions Applicable to Fort Wayne Plan Accounts.	67
	8.23	Special Provisions Applicable to Pleasant Plan Nonelective Account.	67
ARTICLE IX OPERATION AND ADMINISTRATION OF THE PLAN			67
	9.1	Plan Administration.	67
	9.2	Committee Powers.	68
	9.3	Investment Manager.	71
	9.4	Periodic Review.	71
	9.5	Committee Procedure.	71

iii

	9.6	Compensation of Committee.	72
	9.7	Resignation and Removal of Members.	72
	9.8	Appointment of Successors.	72
	9.9	Records.	72
	9.10	Reliance Upon Documents and Opinions.	73
	9.11	Requirement of Proof.	73
	9.12	Reliance on Committee Memorandum.	74
	9.13	Multiple Fiduciary Capacity.	74
	9.14	Limitation on Liability.	74
	9.15	Indemnification.	74
	9.16	Allocation of Fiduciary Responsibility.	75
	9.17	Bonding.	75
	9.18	Prohibition Against Certain Actions.	75
	9.19	Plan Expenses.	76
ARTICLE X SPECIAL PROVISIONS CONCERNING COMPANY STOCK EFFECTIVE AS OF OCTOBER 1, 1992			76
	10.1	Securities Transactions.	76
	10.2	Valuation of Company Securities.	77
	10.3	Allocation of Stock Dividends and Splits.	77
	10.4	Reinvestment of Dividends.	78
	10.5	Voting of Company Stock.	78
	10.6	Confidentiality Procedures.	79
	10.7	Securities Law Limitation.	79
ARTICLE XI MERGER OF COMPANY; MERGER OF PLAN			79
	11.1	Effect of Reorganization or Transfer of Assets.	79
	11.2	Merger Restriction.	79
ARTICLE XII PLAN TERMINATION AND DISCONTINUANCE OF CONTRIBUTIONS			80
	12.1	Plan Termination.	80
	12.2	Discontinuance of Contributions.	80
	12.3	Rights of Participants.	81
	12.4	Trustee’s Duties on Termination.	81
	12.5	Partial Termination.	82
	12.6	Failure to Contribute.	82
ARTICLE XIII APPLICATION FOR BENEFITS			83
	13.1	Application for Benefits.	83
	13.2	Action on Application.	83
	13.3	Appeals.	83
ARTICLE XIV LIMITATIONS ON CONTRIBUTIONS			84
	14.1	General Rule.	84
	14.2	Annual Additions.	85

iv

	14.3	Other Defined Contribution Plans.	85
	14.4	Adjustments for Excess Annual Additions.	85
	14.5	Disposition of Excess Amounts.	86
	14.6	Affiliated Company.	87
ARTICLE XV RESTRICTION ON ALIENATION			87
	15.1	General Restrictions Against Alienation.	87
	15.2	Nonconforming Distributions Under Court Order.	88
ARTICLE XVI PLAN AMENDMENTS			89
	16.1	Amendments.	89
	16.2	Retroactive Amendments.	90
	16.3	Amendment of Vesting Provisions.	90
ARTICLE XVII TOP-HEAVY PROVISIONS			90
	17.1	Minimum Company Contributions.	90
	17.2	Compensation.	91
	17.3	Top-Heavy Determination.	91
	17.4	Aggregation.	93
ARTICLE XVIII MISCELLANEOUS			94
	18.1	No Enlargement of Employee Rights.	94
	18.2	Mailing of Payments; Lapsed Benefits.	94
	18.3	Addresses.	95
	18.4	Notices and Communications.	96
	18.5	Reporting and Disclosure.	96
	18.6	Governing Law.	96
	18.7	Interpretation.	96
	18.8	Certain Securities Laws Rules.	97
	18.9	Withholding for Taxes.	97
	18.10	Limitation on Company; Committee and Trustee Liability.	97
	18.11	Successors and Assigns.	97
	18.12	Counterparts.	97
	18.13	Military Service.	97

v

PERSONAL INVESTMENT PLAN

ARTICLE I

GENERAL

1.1 Plan Name.

This instrument evidences the terms of a tax-qualified retirement plan for the Eligible Employees of Mattel, Inc. and its participating affiliates to be known as the “Mattel, Inc. Personal Investment Plan” (“Plan”).

1.2 Plan Purpose.

This Plan is intended to qualify under Code Section 401(a) as a profit sharing plan, although contributions may be made to the Plan without regard to profits, and with respect to the portion hereof intended to qualify as a Qualified Cash or Deferred Arrangement, to satisfy the requirements of Code Section 401(k).

1.3 Effective Date.

The original effective date of this Plan is November 1, 1983. This amendment and restatement of the Plan reflects the provisions of the Plan in effect as of January 1, 2006, except as otherwise expressly provided herein.

1.4 Plan Mergers.

Effective April 1, 1997, the Fisher-Price, Inc. Matching Savings Plan (the “F-P Savings Plan”) was merged with and into this Plan and the account balances under the former F-P Savings Plan were transferred to corresponding accounts under this Plan as follows:

F-P Savings Plan Account	Corresponding Plan Account
Employee Contribution Account	Before-Tax Contributions Account
Company Matching Account	Company Matching Account
Discretionary Contribution Account	Company Matching Account
Profit Sharing Account	Transfer/Rollover Account
Rollover Contributions Account	Transfer/Rollover Account

Effective January 2, 1998, the Tyco Toys, Inc. 401(k) Savings Plan (“Tyco Plan”) was with and into this Plan and the account balances under the former Tyco Plan were transferred to corresponding accounts under this Plan as follows:

Tyco Plan Account	Corresponding Plan Account
Deferral Contributions Account	Tyco Before-Tax Contributions Account
Regular Matching Contributions Account	Tyco Company Matching Account
Rollover Contribution Account	Transfer/Rollover Account

Effective June 30, 2000, the PrintPaks, Inc. 401(k) Plan (“PrintPaks Plan”) was merged with and into this Plan and the account balances under the former PrintPaks Plan were transferred to corresponding accounts under this Plan as follows:

PrintPaks Plan Account	Corresponding Plan Account
Elective Deferrals Account	PrintPaks Before-Tax Contributions Account
Matching Contributions Account	PrintPaks Company Matching Account
Rollover Contributions Account	Transfer/Rollover Account

Effective December 15, 2000, the Mattel-Fort Wayne Hourly 401(k) Plan (the “Fort Wayne Plan”) was merged with and into this Plan and the account balances under the former Fort Wayne Plan were transferred to corresponding accounts under this Plan as follows:

Fort Wayne Plan Account	Corresponding Plan Account
Elective Deferrals Account	Fort Wayne Plan Before-Tax Contributions Account
Matching Contributions Account	Fort Wayne Plan Company Matching Account
Nonelective Contributions Account	Fort Wayne Plan Nonelective Account
Rollover Contributions Account	Transfer/Rollover Account

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Effective October 1, 2001, the Pleasant Company Retirement Savings Plan (the “Pleasant Plan”) was merged with and into this Plan and the account balances under the former Pleasant Plan were transferred to corresponding accounts under this Plan as follows:

Pleasant Plan Account	Corresponding Plan Account
Employer Nonelective Contributions Account	Pleasant Plan Nonelective Account
Rollover Contributions Account	Transfer/Rollover Account

ARTICLE II

DEFINITIONS

2.1 Accounts.

“Accounts” or “Participant’s Accounts” means the following Plan accounts maintained by the Committee for each Participant as required by Article VII:

(a) “Before-Tax Contributions Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to Participant Before-Tax Contributions, and any earnings thereon, in accordance with Article V.

(b) “After-Tax Contributions Account” shall mean the account established and maintained for each Participant under Article VII to reflect amounts held in the Trust Fund on behalf of such Participant which are attributable to Participant After-Tax Contributions and any earnings thereon, in accordance with Article V.

(c) “Company Matching Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to Company Matching Contributions, and any earnings thereon, pursuant to Section 6.1(c).

(d) “Company Contributions Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to Company Contributions, and any earnings thereon, pursuant to Section 6.1(a).

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(e) “Transfer/Rollover Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to amounts distributed to the Participant from any other plan qualified under Code Section 401(a), or from an Individual Retirement Account attributable to employer contributions under another plan qualified under Code Section 401(a), and any earnings on such amounts, as provided in Section 5.8.

(f) “Tyco Before-Tax Contributions Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to Participant before-tax contributions to the Tyco Plan, and any earnings thereon, in accordance with Article V.

(g) “Tyco Company Matching Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to matching contributions to the Tyco Plan, and any earnings thereon, in accordance with Article V.

(h) “PrintPaks Before-Tax Contributions Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to Participant before-tax contributions to the PrintPaks Plan, and any earnings thereon, in accordance with Article V.

(i) “PrintPaks Company Matching Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to matching contributions to the PrintPaks Plan, and any earnings thereon, in accordance with Article V.

(j) “Fort Wayne Plan Before-Tax Contributions Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to Participant before-tax contributions to the Fort Wayne Plan, and any earnings thereon, in accordance with Article V.

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(k) “Fort Wayne Plan Company Matching Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to matching contributions to the Fort Wayne Plan, and any earnings thereon, in accordance with Article V.

(l) “Fort Wayne Plan Nonelective Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to nonelective contributions to the Fort Wayne Plan, and any earnings thereon, in accordance with Article V.

(m) “Pleasant Plan Nonelective Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to nonelective contributions to the Pleasant Plan, and earnings thereon, in accordance with Article V.

(n) “Tyco Retirement Plan Account” shall mean the account established and maintained for each Participant under Article VII for purposes of holding and accounting for amounts held in the Trust Fund which are attributable to contributions to the Tyco Retirement Plan, and any earnings thereon, in accordance with Article V.

2.2 Affiliated Company.

“Affiliated Company” shall mean:

(a) Any corporation that is included in a controlled group of corporations, within the meaning of Section 414(b) of the Code, that includes the Company,

(b) Any trade or business that is under common control with the Company within the meaning of Section 414(c) of the Code,

(c) Any member of an affiliated service group, within the meaning of Section 414(m) of the Code, that includes the Company, and

(d) Any other entity required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code.

2.3 After-Tax Contributions.

“After-Tax Contributions” shall mean those contributions by a Participant to the Trust Fund in accordance with Article V which do not qualify as Before-Tax Contributions.

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2.4 Before-Tax Contributions.

“Before-Tax Contributions” shall mean those amounts contributed to the Plan as a result of a salary or wage reduction election made by the Participant in accordance with Article V, to the extent such contributions qualify for treatment as contributions made under a “qualified cash or deferred arrangement” within the meaning of Section 401(k) of the Code.

2.5 Beneficiary.

“Beneficiary” or “Beneficiaries” shall mean the person or persons last designated by a Participant as set forth in Section 8.9 or, if there is no designated Beneficiary or surviving Beneficiary, the person or persons designated in Section 8.9 to receive the interest of a deceased Participant in such event.

2.6 Board of Directors.

“Board of Directors” shall mean the Board of Directors (or its delegate) of Mattel, Inc. as it may from time to time be constituted.

2.7 Code.

“Code” shall mean the Internal Revenue Code of 1986, as in effect on the date of execution of this Plan document and as thereafter amended from time to time.

2.8 Committee.

“Committee” shall mean the Administrative Committee described in Article IX hereof.

2.9 Company.

“Company” shall mean Mattel, Inc., or any successor thereof, if its successor shall adopt this Plan.

2.10 Company Contributions.

“Company Contributions” shall mean amounts paid by a Participating Company into the Trust Fund in accordance with Section 6.1(a) and 6.1(b).

2.11 Company Matching Contributions.

“Company Matching Contributions” shall mean amounts paid by a Participating Company into the Trust Fund in accordance with Section 6.1(c).

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2.12 Company Stock.

“Company Stock” shall mean whichever of the following is applicable:

(a) So long as the Company has only one class of stock, that class of stock.

(b) In the event the Company at any time has more than one class of stock, the class (or classes) of the Company’s stock constituting “employer securities” as that term is defined in Section 409(1) of the Code.

2.13 Compensation.

(a) “Compensation” shall mean the full salary and wages (including overtime, shift differential, tips and holiday, vacation and sick pay) and other compensation paid by a Participating Company during a Plan Year by reason of services performed by an Employee, including amounts deducted pursuant to authorization by an Employee or pursuant to requirements of law (including amounts of salary or wages deferred in accordance with the provisions of Section 5.1 and which qualify for treatment under Code Section 401(k) or amounts deducted pursuant to Code Section 125, 129 or 132(f)(4)) except as specifically provided to the contrary elsewhere in this Plan. Compensation shall not include any of the following:

(i) Fringe benefits and contributions by the Participating Company to, and benefits under, any employee benefit plan;

(ii) Amounts paid or payable by reason of services performed during any period in which an Employee is not a Participant under the Plan;

(iii) Amounts deferred by the Employee pursuant to non-qualified deferred compensation plans, regardless of whether such amounts are includable in the Employee’s gross income for his current taxable year;

(iv) Amounts included in any Employee’s gross income with respect to life insurance as provided by Code Section 79; and

(v) Amounts paid to Employees as “bonuses.”

(b) To the extent permitted by Code Section 415(c)(3), in the case of a Participant who ceases actively to perform services for a Participating Company prior to January 1, 1989 because such person has sustained a Total and Permanent Disability, such Participant shall be deemed to have “Compensation” to the extent provided in the

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provisions of Section 8.17(d), for the limited purposes of determining the amount of certain contributions to this Plan.

(c) The term “Compensation,” for purposes of Article XIV of this Plan, shall mean wages as defined in Section 3401(a) and all other payments of compensation to an Employee by the Company (in the course of the Company’s trade or business) for which the Company is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation for purposes of this Subsection (c) shall be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). The term “Compensation” for purposes of Article XV of this Plan, shall include any elective deferral (as defined in Code Section 402(g)) and any amount which is contributed or deferred by a Participating Company at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Section 125 or 132(f)(4).

(d) In the event that this Plan is deemed a Top-Heavy Plan as set forth in Article XVII, the term “Compensation” shall not include amounts excluded by reason of and to the extent provided by Sections 17.1 and 17.2.

(e) Effective for Plan Years commencing on and after January 1, 2002, the “Compensation” of any Employee taken into account under the Plan for any Plan Year shall not exceed $200,000 (or such adjusted amount as may be prescribed for such Plan Year pursuant to Section 401(a)(17) of the Code).

2.14 Deferral Limitation.

“Deferral Limitation” shall mean the dollar limitation on the exclusion of elective deferrals from a Participant’s gross income under Section 402(g) of the Code, as in effect with respect to the taxable year of the Participant, or such greater limitation on the exclusion of elective deferrals permitted under Section 5.2(f) and Section 414(v) of the Code, if applicable.

2.15 Distributable Benefit.

“Distributable Benefit” shall mean the vested interest of a Participant in this Plan which is determined and distributable in accordance with the provisions of Article VIII following the termination of the Participant’s employment.

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2.16 Early Retirement Date.

“Early Retirement Date” shall mean the later of the Participant’s 55th birthday or the date on which the Participant completes three Years of Service.

2.17 Effective Date.

“Effective Date” shall mean November 1, 1983, which shall be the original effective date of this Plan. The effective date of this amendment and restatement is January 1, 2006.

2.18 Eligible Employee.

“Eligible Employee” shall include any individual who (i) on or after October 1, 2001 is at least age twenty (20) or prior to October 1, 2001 is at least age twenty and one-half (20 ¹/2) and (ii) is employed by a Participating Company, except

(a) any Employee who is covered by a collective bargaining agreement to which a Participating Company is a party if there is evidence that retirement benefits were the subject of good faith bargaining between the Participating Company and the collective bargaining representative, unless the collective bargaining agreement provides for coverage under this Plan,

(b) any Employee who is a Leased Employee,

(c) any Employee who is an intern, toy tester, department aide, associate retail services representative or in the following pay groups: AFL or MAG, or

(d) any Employee who is employed outside of the United States who has been transferred to the United States for a period of less than twelve (12) months, or

(e) any person who is classified by a Participating Company as being in one or more of the following ineligible categories, even if the Participating Company’s classification is incorrect or the person is otherwise determined to be a common law employee of the Participating Company:

(i) Project Employees—persons who the Participating Company classifies as employed to work on discrete projects or creative matters, or the equivalent (such as students or interns), except to the extent the Participating Company, by written notice, elects to extend Plan participation to them;

(ii) Persons Waiving Participation—persons to whom the Participating Company did not extend the opportunity of participating in this Plan, and who, as determined by the Participating Company, agreed to such nonparticipation status;

(iii) Persons Not Classified As Employees for Tax Purposes—persons who the Participating Company does not classify as Employees for federal tax

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purposes, as evidenced by its failure to withhold employment and income taxes from their compensation, including, without limitation, independent contractors, consultants, persons working for a nonparticipating employer that provides goods or services (including temporary employee services) to the Participating Company, and persons working for an entity for whom the Participating Company provides goods or services;

(iv) Non-Employees Taken into Account for Discrimination Testing or Other Statutory Purposes—persons who are not classified by the Participating Company as its Employees, but who must be taken into account in testing this Plan for discrimination or for other statutory purposes; or

(v) Employees on Terminal Leave—persons who the Participating Company has determined to have permanently ceased to render active services but who it continues to treat as employees for certain purposes, except to the extent the Participating Company, by written notice, elects to extend Plan participation to them.

2.19 Employee.

(a) “Employee” shall mean each person currently employed in any capacity by the Company or Affiliated Company any portion of whose income is subject to withholding of income tax and/or for whom Social Security contributions are made by the Company. The term “Employee” also includes a Leased Employee to the extent required by Code Section 414(n).

(b) Although Eligible Employees are the only class of Employees eligible to participate in this Plan, the term “Employee” is used to refer to persons employed in a non-Eligible Employee capacity as well as Eligible Employee category. Thus, those provisions of this Plan that are not limited to Eligible Employees, such as those relating to Hours of Service, apply to both Eligible and non-Eligible Employees.

2.20 Employment Commencement Date.

“Employment Commencement Date” shall mean each of the following:

(a) The date on which an Employee first performs an Hour of Service in any capacity for the Company or an Affiliated Company with respect to which the Employee is compensated or is entitled to compensation by the Company or the Affiliated Company.

(b) In the case of an Employee who has a one-year Period of Severance and who is subsequently reemployed by the Company or an Affiliated Company, the term

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“Employment Commencement Date” shall also mean the first day following such one-year Period of Severance on which the Employee performs an Hour of Service for the Company or an Affiliated Company with respect to which he is compensated or entitled to compensation by the Company or Affiliated Company.

2.21 ERISA.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

2.22 Fort Wayne Plan.

“Fort Wayne Plan” shall mean the Mattel-Fort Wayne Hourly 401(k) Plan, which was merged with and into this Plan effective December 15, 2000.

2.23 F-P Savings Plan.

“F-P Savings Plan” shall mean the Fisher-Price, Inc. Matching Savings Plan, which was merged with and into this Plan effective April 1, 1997.

2.24 Governance Committee.

“Governance Committee” shall mean the Governance and Social Responsibility Committee of the Board of Directors.

2.25 Highly Compensated Employee.

(a) “Highly Compensated Employee” shall mean any Employee who performs services for the Company or an Affiliated Company during the Determination Year (as defined below) and who:

(i) was at any time during the Determination Year or the Look Back Year a five percent (5%) owner described in Section 17.3; or

(ii) for the Look Back Year:

(A) received Compensation from the Company or an Affiliated Company in excess of eighty thousand dollars ($80,000) (adjusted for any cost-of-living increase as permitted by Section 414(q) of the Code); and

(B) was in the “top-paid group.”

The determination of which Employees are Highly Compensated Employees shall be made in accordance with the provisions of Section 414(q) of the Code.

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(b) Determination of a Highly Compensated Employee shall be in accordance with the following definitions and special rules:

(i) “Determination Year” means the Plan Year for which the determination of Highly Compensated Employee is being made.

(ii) “Look Back Year” is the twelve (12) month period preceding the Determination Year.

(iii) An Employee shall be treated as a 5% owner for any Determination Year or Look Back Year if at any time during such Year such Employee was a 5% owner (as defined in Section 17.3).

(iv) An Employee is in the “top-paid group” of Employees for any Determination Year or Look Back Year if such Employee is in the group consisting of the top twenty percent (20%) of the Employees when ranked on the basis of Compensation paid during such Year.

(v) For purposes of this Section the term “Compensation” means Compensation as defined in Code Section 415(c)(3), as set forth in Section 2.13(c), without regard to the limitations of Section 2.13(e); provided, however, the determination under this Paragraph (vi) shall be made without regard to Code Sections 125, 132(f)(4), 402(a)(8), and 401(h)(1)(B), and in the case of Participant contributions made pursuant to a salary reduction agreement, without regard to Code Section 403(b).

(vi) For purposes of determining the number of Employees in the “top-paid” group under this Section, the following Employees shall be excluded:

(A) Employees who have not completed six (6) months of service,

(B) Employees who normally work less than 17 ¹/2 hours per week,

(C) Employees who normally work not more than six (6) months during any Plan Year, and

(D) Employees who have not attained age 20,

(E) Except to the extent provided in Treasury Regulations, Employees who are included in a unit of employees covered by an

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agreement which the Secretary of Labor finds to be a collective bargaining agreement between Employee representatives and the Company, and

(F) Employees who are nonresident aliens and who receive no earned income (within the meaning of Code Section 911(d)(2)) from the Company which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)).

The Company may elect to apply Subparagraphs (A) through (D) above by substituting a shorter period of service, smaller number of hours or months, or lower age for the period of service, number of hours or months, or (as the case may be) than as specified in such Subparagraphs.

(vii) A former Employee shall be treated as a Highly Compensated Employee if

(A) such Employee was a Highly Compensated Employee when such Employee incurred a severance, or

(B) such Employee was a Highly Compensated Employee at any time after attaining age fifty-five (55).

(viii) Code Sections 414(b), (c), (m) and (o) shall be applied before the application of this Section. Also, the term “Employee” shall include Leased Employees unless such Leased Employee is covered under a “safe harbor” plan of the leasing organization and not covered under a qualified plan of the Affiliated Company.

(c) To the extent permissible under Code Section 414(q), the Committee may determine which Employees shall be categorized as Highly Compensated Employees by applying a simplified method and calendar year election prescribed by the Internal Revenue Service.

2.26 Hour of Service.

(a) “Hour of Service” of an Employee shall mean the following:

(i) Each hour for which the Employee is paid by the Company or an Affiliated Company or entitled to payment for the performance of services as an Employee.

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(ii) Each hour in or attributable to a period of time during which the Employee performs no duties (irrespective of whether he has terminated his Employment) due to a vacation, holiday, illness, incapacity (including pregnancy or disability), layoff, jury duty, military duty or a Leave of Absence, for which he is so paid or so entitled to payment, whether direct or indirect. However, no such hours shall be credited to an Employee if such Employee is directly or indirectly paid or entitled to payment for such hours and if such payment or entitlement is made or due under a plan maintained solely for the purpose of complying with applicable workmen’s compensation, unemployment compensation or disability insurance laws or is a payment which solely reimburses the Employee for medical or medically related expenses incurred by him.

(iii) Each hour for which he is entitled to back pay, irrespective of mitigation of damages, whether awarded or agreed to by the Company or an Affiliated Company, provided that such Employee has not previously been credited with an Hour of Service with respect to such hour under paragraphs (i) or (ii) above.

(b) Hours of Service under Subsections (a)(ii) and (a)(iii) shall be calculated in accordance with Department of Labor Regulation 29 C.F.R. § 2530.200b-2(b). Hours of Service shall be credited to the appropriate computation period according to the Department of Labor Regulation § 2530.200b-2(c). However, an Employee will not be considered as being entitled to payment until the date when the Company or the Affiliated Company would normally make payment to the Employee for such Hour of Service.

2.27 Investment Manager.

“Investment Manager” means the one or more Investment Managers, if any, that are appointed pursuant to Section 9.3.

2.28 Leased Employee.

“Leased Employee” means any individual who is not an employee of any Affiliated Company but who performs services for an Affiliated Company, where:

(a) such services are provided pursuant to an agreement between the member and any other person (the “leasing organization”);

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(b) the individual has performed such services for the Affiliated Company, or for the Affiliated Company and any “related persons” determined under Section 414(n)(6) of the Code, on a substantially full-time basis for a period of at least one (1) year; and

(c) such services are performed under the primary direction or control of the recipient.

2.29 Murray Hourly Employee.

“Murray Hourly Employee” shall mean an Employee at the Murray, Kentucky location of Mattel Operations, Inc. who is compensated on a per hour basis.

2.30 Normal Retirement.

“Normal Retirement” shall mean a Participant’s termination of employment on or after attaining the Plan’s Normal Retirement Date.

2.31 Normal Retirement Date.

“Normal Retirement Date” shall be the Participant’s sixty-fifth birthday.

2.32 Participant.

“Participant” shall mean any Eligible Employee who has satisfied the participation eligibility requirements set forth in Section 3.1 and has begun participation in this Plan in accordance with the provisions of Section 3.2.

2.33 Participation Commencement Date.

“Participation Commencement Date” shall mean the day on which an Employee’s participation in this Plan may commence in accordance with the provisions of Article III.

2.34 Participating Company.

“Participating Company” shall mean Mattel, Inc., Mattel Sales, Inc. and each other Affiliated Company (or similar entity) that has been granted permission by the Board of Directors to participate in this Plan, provided that contributions are being made hereunder for the Employees of such Participating Company. Permission to become a Participating Company shall be granted under such conditions and upon such conditions as the Board of Directors deems appropriate. Effective April 1, 1997, Fisher-Price, Inc. and each other adopting employer in the F-P Savings Plan shall be a Participating Company in this Plan. Effective January 2, 1998, Tyco Toys, Inc. and each other adopting employer in the Tyco Plan shall be a Participating Company in this Plan. Effective March 1, 1998, PrintPaks, Inc. and each other adopting employer in the

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PrintPaks Plan shall be a Participating Company in this Plan. Effective October 1, 2001, American Girl, Inc. (the successor to the assets and business of Pleasant Company) and such other adopting employer in the Pleasant Plan shall be a Participating Company in this Plan.

2.35 Period of Severance.

“Period of Severance” shall mean the period of time commencing on the Participant’s Severance Date and continuing until the first day, if any, on which the Participant completes one or more Hours of Service following such Severance Date.

2.36 Plan.

“Plan” shall mean the Mattel, Inc. Personal Investment Plan herein set forth, and as it may be amended from time to time.

2.37 Plan Administrator.

“Plan Administrator” shall mean the administrator of the Plan, within the meaning of Section 3(16)(A) of ERISA. The Plan Administrator shall be Mattel, Inc.

2.38 Plan Year.

“Plan Year” shall mean the fiscal year of the Company. Effective as of January 1, 1992, the fiscal year of the Company is the twelve consecutive month period ending December 31.

2.39 Pleasant Plan.

“Pleasant Plan” shall mean the Pleasant Company Retirement Savings Plan, which was merged with and into this Plan effective October 1, 2001.

2.40 PrintPaks Plan.

“PrintPaks Plan” shall mean the PrintPaks, Inc. 401(k) Plan, which was merged with and into this Plan effective June 30, 2000.

2.41 Severance Date.

“Severance Date” shall mean the earlier of (a) the date on which an Employee quits, retires, is discharged, or dies; or (b) the first anniversary of the first date of a period in which an Employee remains absent from service (with or without pay) with the Company or an Affiliated Company for any reason other than quit, retirement, discharge or death (such as vacation, holiday, sickness, disability, leave of absence or layoff).

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In the case of an Employee who has a maternity or paternity absence described in Code Sections 410(a)(5)(E) and 411(a)(6)(E), the Employee’s Period of Severance will begin on the second anniversary of the date the Employee is first absent for a maternity or paternity leave, provided the Employee does not perform an Hour of Service during such period. The first one-year period of the absence will be included in the Employee’s period of service and the second one-year period is neither part of the period of service nor part of the Period of Severance. The Committee may require that the Employee furnish such timely information as the Committee may reasonably require to establish that the absence from work is for such a maternity or paternity absence, and the number of days for which there was such an absence.

2.42 Total and Permanent Disability.

An individual shall be considered to be suffering from a Total and Permanent Disability if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than 12 months. An individual’s disabled status shall be determined by the Committee, based on such evidence as the Committee determines to be sufficient. The rules of this Section shall be applied by the Committee in accordance with Treasury Regulations, if any, promulgated under Code Section 415 or Code Section 22(e)(3).

2.43 Trust or Trust Fund.

“Trust” or “Trust Fund” shall mean the one or more trusts created for funding purposes under the Plan.

2.44 Trustee.

“Trustee” shall mean the corporation appointed by the Company to act as Trustee of the Trust Fund, or any successor or other corporation acting as a trustee of the Trust Fund.

2.45 Tyco Plan.

“Tyco Plan” shall mean the Tyco Toys, Inc. 401(k) Savings Plan, which was merged with and into this Plan effective January 2, 1998.

2.46 Tyco Retirement Plan.

“Tyco Retirement Plan” shall mean the Tyco Manufacturing Retirement Plan which was terminated effective as of December 31, 2006.

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2.47 Valuation Date.

“Valuation Date” shall mean each day on which the United States financial markets are open for the normal transaction of business.

2.48 Year of Service.

“Year of Service” means three hundred sixty five (365) days included in a period of service recognized under this Section 2.48.

(a) Subject to the succeeding provisions of this Section 2.48, a Participant shall be credited with a period of service equal to the elapsed time between his Employment Commencement Date and his subsequent Severance Date.

(b) A Participant additionally shall receive credit for a Period of Severance in computing his service hereunder if such Participant completes an Hour of Service prior to the first anniversary of his Severance Date. Except as provided in this Section 2.48(b), a Period of Severance shall not be included in a Participant’s period of service hereunder.

(c) If a Participant who does not have any vested interest in his accounts under the Plan has five (5) consecutive one-year Periods of Severance, any prior period of service shall be disregarded for all purposes of the Plan. Periods of service credited under this Section 2.48 before such five (5) consecutive one-year Periods of Severance shall not include any period or periods of service that are not required to be taken into account under this Section 2.48(c) by reason of any prior Periods of Severance.

(d) The number of a Participant’s Years of Service for vesting shall be determined by reference to each three hundred sixty five day period of service recognized under this Section 2.48, whether or not consecutive.

(e) Notwithstanding any other provision of this Plan, service performed by Employees for employers other than the Company or Affiliated Companies may be taken into account in computing service for any purpose of this Plan to the extent and in the manner determined by resolution of the Committee in its sole discretion.

(f) Notwithstanding any other provision of this Plan, service performed for an Affiliated Company prior to such entity becoming an Affiliated Company may be taken into account for purposes of computing service for any purpose of this Plan to the extent and in the manner determined by resolution of the Board of Directors of the Company in its sole discretion.

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(g) In the case of a Participant who was actively employed by Tyco Toys, Inc. or its affiliates on the date of acquisition of Tyco Toys, Inc. by the Company, service performed by such Participant for Tyco Toys, Inc. and its affiliates for periods prior to the date of such acquisition shall be taken into account for purposes of determining such Participant’s vested interest in his Accounts under this Plan.

(h) In the case of a Participant who was actively employed by PrintPaks, Inc. or its affiliates on the date of acquisition of PrintPaks, Inc. by the Company, service performed by such Participant for PrintPaks, Inc. and its affiliates for periods prior to the date of such acquisition shall be taken into account for purposes of determining such Participant’s vested interest in his Accounts under this Plan.

(i) In the case of a Participant who was actively employed by Pleasant Company or its affiliates on the date of acquisition of Pleasant Company by the Company, service performed by such Participant for Pleasant Company and its affiliates for periods prior to the date of such acquisition shall be taken into account for purposes of determining such Participant’s vested interest in his Accounts under this Plan.

ARTICLE III

ELIGIBILITY AND PARTICIPATION

3.1 Eligibility to Participate.

(a) Every Eligible Employee who is not a Murray Hourly Employee shall become eligible to participate in the Plan on the date he becomes an Eligible Employee. Every Eligible Employee who is a Murray Hourly Employee shall become eligible to participate in the Plan on the later of (i) the date he becomes an Eligible Employee or (ii) the date he completes a period of service recognized under Section 2.48 of ninety (90) days.

(b) If an Eligible Employee ceases to be an Eligible Employee he shall again become eligible to participate in the Plan on the date he again becomes an Eligible Employee.

(c) Notwithstanding the preceding rules of this Section 3.1, the actual date upon which an Employee will commence participation will be determined pursuant to the rules of Section 3.2.

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3.2 Commencement of Participation.

(a) Each Eligible Employee who had become a Participant in the Plan prior to the Effective Date of this restatement shall participate in the Plan from and after such date to the extent provided in the Plan.

(b) Each Eligible Employee shall be entitled to commence participation in this Plan with respect to Company Contributions, Company Matching Contributions, After-Tax Contributions and Before-Tax Contributions as of the date he becomes an Eligible Employee.

(c) The Committee may prescribe such rules as it deems necessary or appropriate regarding times and procedures for Participants to make elections to contribute a portion of Compensation as provided in Section 5.1.

3.3 Historical Participation Dates.

(a) From January 1, 1987 to June 30, 1988, each Eligible Employee shall be entitled to commence Employee contributions as set forth in Article V and Company Matching Contributions on the January 1 after their Employment Commencement Date.

(b) Effective July 1, 1988, each Eligible Employee shall be entitled to commence After-Tax Contributions and Company Matching Contributions as of the date he becomes an Eligible Employee.

(c) Effective January 1, 1989, each Eligible Employee shall be entitled to commence Before-Tax Contributions and Company Matching Contributions as set forth in Section 6.1(b) as of the date he becomes an Eligible Employee.

3.4 Former Participants in F-P Savings Plan.

Notwithstanding anything in this Article to the contrary, any individual who was a participant in the F-P Savings Plan on March 31, 1997 shall automatically become a Participant in this Plan effective as of April 1, 1997.

3.5 Former Participants in Tyco Plan.

Notwithstanding anything in this Article to the contrary, any individual who was a participant in the Tyco Plan on December 31, 1997, shall automatically become a Participant in this Plan effective as of January 1, 1998.

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3.6 Former Participants in PrintPaks Plan.

Notwithstanding anything in this Article to the contrary, any individual who was a participant in the PrintPaks Plan on February 28, 1998, shall automatically become a Participant in this Plan effective as of March 1, 1998.

3.7 Former Participants in Pleasant Plan.

Notwithstanding anything in this Article to the contrary, any individual who was a participant in the Pleasant Plan on September 30, 2001, shall automatically become a Participant in this Plan effective as of October 1, 2001.

3.8 Former Tyco Retirement Plan.

Notwithstanding anything in this Article to the contrary, any individual who was a participant in the Tyco Retirement Plan as of December 31, 2006, the date such plan was terminated, whose accounts under the Tyco Retirement Plan were transferred to this Plan (either by election of the individual or by default), shall automatically become a Participant in this Plan effective as of the date such assets are transferred from the Tyco Retirement Plan; provided that, such Participant shall not be permitted to make Employee contributions in accordance with Article V or receive Company Contributions in accordance with Article VI unless the Participant is an Eligible Employee who would otherwise be a Participant under the Plan in the absence of the provisions of this Section 3.8.

ARTICLE IV

TRUST FUND

4.1 Trust Fund.

(a) The Company has entered into a Trust Agreement for the establishment of a Trust to hold the assets of the Plan. Simultaneously with the establishment of this Plan the Company shall pay to the Trustee a specified sum of money as its initial contribution to the Trust Fund. The Trustee shall acknowledge receipt of this contribution and shall agree to hold and administer this contribution together with such additional funds and assets that may be subsequently deposited with the Trustee pursuant to the terms of this Plan.

(b) The Trust Fund is authorized to invest in either Company Stock or such other assets as the Committee or the Investment Manager (if applicable) may direct.

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Participants may direct the investment of the assets in their Accounts in the Trust Fund from among the acceptable investment alternatives which the Committee may from time to time make available. The Committee shall provide Participants with such alternative investment election options and such information regarding the investment alternatives available under the Plan as shall be necessary to comply with the regulations issued by the Department of Labor pursuant to ERISA Section 404(c).

(c) The Committee shall not be required to engage in any transaction, including without limitation, directing the purchase or sale of Company Stock, which it determines in its sole discretion, might tend to subject itself, its members, the Plan, the Company, or any Participant to liability under federal or state securities law.

ARTICLE V

EMPLOYEE CONTRIBUTIONS

5.1 Employee Contributions.

In accordance with rules which the Committee shall prescribe from time to time, each Participant shall be given an opportunity to elect to have a percentage of his or her Compensation contributed to the Plan. A contribution election by a Participant shall remain in effect from year to year (notwithstanding salary or wage rate changes) until changed by the Participant. Effective January 1, 1987, at the election of the Participant, contributions shall be made as Before-Tax Contributions, After-Tax Contributions or a combination thereof.

5.2 Amount Subject to Election.

(a) Effective January 1, 2002, subject to the limitations of Article V, the amount of a Participant’s Compensation that may be contributed subject to the election provided in Section 5.1 shall be a whole percentage of the Participant’s Compensation, which percentage is not less than one percent (1%) nor more than (i) in the case of a Highly Compensated Employee, twenty percent (20%) or (ii) in the case of a Participant who is not a Highly Compensated Employee, eighty percent (80%).

(b) No Participant shall be permitted to make Before-Tax Contributions in excess of the Deferral Limitation. Any election by a Participant to make Before-Tax Contributions shall be deemed to include an election to automatically substitute After-Tax Contributions for such Before-Tax Contributions, effective for the period starting on the date immediately following the date the Participant’s Before-Tax Contributions for a

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calendar year equal the Deferral Limitation and ending on the immediately following December 31. In the event a Participant’s Before-Tax Contributions exceed the Deferral Limitation, excess contributions shall be subject to the provisions of Section 5.6.

(c) For purposes of satisfying one of the tests described under Section 5.4 and Section 6.3, the Committee may prescribe such rules as it deems necessary or appropriate regarding the maximum amount that a Participant may elect to contribute and the timing of such an election. These rules may prescribe a maximum percentage of Compensation that may be contributed, or may provide that the maximum percentage of Compensation that a Participant may contribute will be a lower percentage of his Compensation above a certain dollar amount of Compensation than the maximum deferral percentage below that dollar amount of Compensation. These rules shall apply to all individuals eligible to make the election described in Section 5.1, except to the extent that the Committee prescribes special or more stringent rules applicable only to Highly Compensated Employees.

(d) Notwithstanding the foregoing, all employees who are eligible to make Before-Tax Contributions under this Plan and who have attained age fifty (50) before the close of a Plan Year shall be eligible to make catch-up contributions during such Plan Year in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Section 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b) or 416 of the Code, as applicable, by reason of the making of such catch-up contributions.

5.3 Termination of, Change in Rate of, or Resumption of Deferrals.

(a) A Participant may at any time submit a request to the Committee to terminate his contributions made pursuant to this Article V.

(b) A Participant may at any time (but not more frequently than once per week) submit a request to the Committee to alter the rate of, or resume his contributions made pursuant to this Article V.

(c) A request for termination, alteration, or resumption or alteration of the rate of contributions shall be in form satisfactory to the Committee and will be effective as

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soon as administratively possible. The Committee may require at least thirty (30) days notice prior to commencement of the payroll period for which such change is to be effective.

5.4 Limitation on Before-Tax Contributions by Highly Compensated Employees.

With respect to each Plan Year, Participant Before-Tax Contributions under the Plan for the Plan Year shall not exceed the limitations on contributions on behalf of Highly Compensated Employees under Section 401(k) of the Code, as provided in this Section. In the event that Before-Tax Contributions under this Plan on behalf of Highly Compensated Employees for any Plan Year exceed the limitations of this Section for any reason, such excess contributions and any income allocable thereto shall be returned to the Participant or recharacterized as Participant After-Tax Contributions, as provided in Section 5.5.

(a) The Before-Tax Contributions by a Participant for a Plan Year shall satisfy the Average Deferral Percentage test set forth in (i)(A) below, or the alternative Average Deferral Percentage test set forth in (i)(B) below. To the extent required by regulations under Code Section 401(m), the Before-Tax Contributions by a Participant for any Plan Year ending prior to January 1, 2002, also shall satisfy the test identified in (ii) below.

(i)(A) The “Actual Deferral Percentage” for Eligible Employees who are Highly Compensated Employees for a Plan Year shall not be more than the “Actual Deferral Percentage” of all other Eligible Employees for the Comparison Year multiplied by 1.25, or

(i)(B) The excess of the “Actual Deferral Percentage” for Eligible Employees who are Highly Compensated Employees for a Plan Year over the “Actual Deferral Percentage” for all other Eligible Employees for the Comparison Year shall not be more than two (2) percentage points, and the “Actual Deferral Percentage” for Eligible Employees who are Highly Compensated Employees for a Plan Year shall not be more than the “Actual Deferral Percentage” of all other Eligible Employees for the Comparison Year multiplied by 2.00.

(ii) The Average Contribution Percentage for any Plan Year ending prior to January 1, 2002 for Highly Compensated Employees eligible to

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participate in this Plan and a plan of the Company or an Affiliated Company that is subject to the limitations of Section 401(m) of the Code including, if applicable, this Plan, shall be reduced in accordance with Section 6.4, to the extent necessary to satisfy the requirements of Treasury Regulations Section 1.401(m)-2. The multiple use test described in Treasury Regulations Section 1.401(m)-2 shall not apply for Plan Years beginning after December 31, 2001.

The “Comparison Year” is the Plan Year being tested.

(b) For the purposes of the limitations of this Section 5.4, the following definitions shall apply:

(i) “Actual Deferral Percentage” means, with respect to Eligible Employees who are Highly Compensated Employees and all other Eligible Employees for a Plan Year, the average of the ratios, calculated separately for each Eligible Employee in such group, of the amount of Before-Tax Contributions under the Plan allocated to each Eligible Employee for such Plan Year to such Employee’s “Compensation” for such Plan Year. An Eligible Employee’s Before-Tax Contributions may be taken into account for purposes of determining his Actual Deferral Percentage for a particular Plan Year only if such Before-Tax Contributions relate to Compensation that either would have been received by the Eligible Employee in the Plan Year (but for the deferral election), or is attributable to services performed in the Plan Year and would have been received by the Eligible Employee within two and one-half (2 ¹/2) months after the close of the Plan Year (but for the deferral election), and such Before-Tax Contributions are allocated to the Eligible Employee as of a date within that Plan Year. For purposes of this rule, an Eligible Employee’s Before-Tax Contributions shall be considered allocated as of a date within a Plan Year only if (A) the allocation is not contingent upon the Eligible Employee’s participation in the Plan or performance of services on any date subsequent to that date, and (B) the Before-Tax Contribution is actually paid to the Trust no later than the end of the twelve month period immediately following the Plan Year to which the contribution relates. To the extent determined by the Committee and in accordance with

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regulations issued by the Secretary of the Treasury, contributions on behalf of an Eligible Employee that satisfy the requirements of Code Section 401(k)(3)(C)(ii) may also be taken into account for the purpose of determining the Actual Deferral Percentage of such Eligible Employee.

(ii) “Compensation” means Compensation determined by the Committee in accordance with the requirements of Section 414(s) of the Code, including, to the extent elected by the Committee, amounts deducted from an Employee’s wages or salary that are excludable from income under Sections 125, 129, 132(f)(4) or 402(e)(3) of the Code.

(c) In the event that as of the last day of a Plan Year this Plan satisfies the requirements of Section 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans which include arrangements under Code Section 401(k), then this Section 5.4 shall be applied by determining the Actual Deferral Percentages of Eligible Employees as if all such plans were a single plan, in accordance with regulations prescribed by the Secretary of the Treasury under Section 401(k) of the Code.

(d) For the purposes of this Section, the Actual Deferral Percentage for any Highly Compensated Employee who is a participant under two or more Code Section 401(k) arrangements of the Company or an Affiliated Company shall be determined by taking into account the Highly Compensated Employee’s Compensation under each such arrangement and contributions under each such arrangement which qualify for treatment under Code Section 401(k), in accordance with regulations prescribed by the Secretary of the Treasury under Section 401(k) of the Code.

(e) For purposes of this Section, the amount of Before-Tax Contributions by a Participant who is not a Highly Compensated Employee for a Plan Year shall be reduced by any Before-Tax Contributions in excess of the Deferral Limitation which have been distributed to the Participant under Section 5.6, in accordance with regulations prescribed by the Secretary of the Treasury under Section 401(k) of the Code.

(f) The determination of the Actual Deferral Percentage of any Participant shall be made after applying the provisions of Section 14.5 relating to certain limits on Annual Additions under Section 415 of the Code.

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(g) The determination and treatment of Before-Tax Contributions and the Actual Deferral Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury.

(h) The Committee shall keep or cause to have kept such records as are necessary to demonstrate that the Plan satisfies the requirements of Code Section 401(k) and the regulations thereunder, in accordance with regulations prescribed by the Secretary of the Treasury.

5.5 Provisions for Disposition of Excess Before-Tax Contributions by Highly Compensated Employees.

(a) The Committee shall determine, as soon as is reasonably possible following the close of each Plan Year, the extent, if any, to which deferral treatment under Code Section 401(k) may not be available for Before-Tax Contributions by Highly Compensated Employees. If, pursuant to the determination by the Committee, any or all of a Participant’s Before-Tax Contributions are not eligible for tax-deferral treatment, then any excess Before-Tax Contributions shall be disposed of in accordance with (i) below or any Excess Before-Tax Contribution and any income for the Plan Year (“Non-Gap Period Income”) allocable thereto shall be disposed of in accordance with (ii) below.

(i) To the extent permissible under Section 6.3, excess Before-Tax Contributions by the Highly Compensated Employee in a Plan Year may be recharacterized as After-Tax Contributions for the Plan Year not later than two and one-half (2 ¹/2) months following the close of the Plan Year. Any recharacterization shall be effective retroactive to the date of the Highly Compensated Employee’s earliest Before-Tax Contributions during the Plan Year in which the excess Before-Tax Contributions were made. To the extent required by Treas. Reg. Section 1.401(k)–1(f)(3), Before-Tax Contributions recharacterized as After-Tax Contributions shall continue to be treated as Before-Tax Contributions for purposes of Article VIII.

(ii) To the extent a Participant’s Before-Tax Contributions cannot be recharacterized in accordance with (i) above, any excess Before-Tax Contributions (and any Non-Gap Period income allocable thereto) in a Plan Year

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shall, if administratively feasible, be distributed to the Participant not later than two and one-half (2 ¹/2) months following the close of the Plan Year in which such excess Before-Tax Contributions were made, but in any event no later than the close of the first Plan Year following the Plan Year in which such excess Before-Tax Contributions were made after withholding any applicable income taxes due on such amounts.

(b) For purposes of this Section, the amount of excess Before-Tax Contributions to be distributed to a Participant for a Plan Year or recharacterized shall be reduced by the amount of any Before-Tax Contributions in excess of the Deferral Limitation (for the Participant’s taxable year that ends with or within the Plan Year) which have been distributed to the Participant under Section 5.6, in accordance with regulations prescribed by the Secretary of the Treasury under Section 401(k) of the Code.

(c) The Committee shall determine the aggregate amount of any excess Before-Tax Contributions by Highly Compensated Employees for a Plan Year by application of the leveling method set forth in Treasury Regulation Section 1.401(k)–1(f)(2) under which the Deferral Percentage of the Highly Compensated Employee who has the highest Deferral Percentage for such Plan Year is reduced to the extent required (i) to enable the Plan to satisfy the Actual Deferral Percentage test, or (ii) to cause such Highly Compensated Employee’s Deferral Percentage to equal the Deferral Percentage of the Highly Compensated Employee with the next highest Deferral Percentage. The recharacterization or distribution (as the case may be) of any excess Before-Tax Contributions shall be made on the basis of the dollar amounts (rather than the individual Deferral Percentages) of the Before-Tax Contributions by Highly Compensated Employees, beginning with the highest such amount.

(d) For purposes of satisfying the Actual Deferral Percentage test, Non-Gap Period income allocable to a Participant’s excess Before-Tax Contributions, as determined under (b) above, shall be determined in accordance with any reasonable method used by the Plan for allocating income to Participant Accounts, provided such method does not discriminate in favor of Highly Compensated Employees and is consistently applied to all Participants for all corrective distributions or recharacterizations under the Plan for a Plan Year. The Committee shall not be liable to

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any Participant (or his Beneficiary, if applicable) for any losses caused by misestimating the amount of any Before-Tax Contributions in excess of the limitations of this Article V and any income allocable to such excess.

(e) To the extent required by regulations under Section 401(k) or 415 of the Code, any excess Before-Tax Contributions with respect to a Highly Compensated Employee shall be treated as Annual Additions under Article XIV for the Plan Year for which the excess Before-Tax Contributions were made, notwithstanding the distribution or recharacterization of such excess in accordance with the provisions of this Section.

5.6 Provisions for Return of Annual Before-Tax Contributions in Excess of the Deferral Limitation.

(a) In the event that due to error or otherwise, a Participant’s Before-Tax Contributions under this Plan exceed the Deferral Limitation for any calendar year (but without regard to amounts of compensation deferred under any other plan), the excess Before-Tax Contributions for the Plan Year, if any, together with any Non-Gap Period income allocable to such amount shall be distributed to the Participant on or before the first April 15 following the close of the calendar year in which such excess contribution is made. The amount of excess Before-Tax Contributions that may be distributed to a Participant under this Section for any taxable year shall be reduced by any excess Before-Tax Contributions previously distributed or recharacterized in accordance with Section 5.5 for the Plan Year beginning with or within such taxable year.

(i) Income on Before-Tax Contributions in excess of the Deferral Limitation shall be calculated in accordance with Section 5.5(e), except calculations of allocable Non-Gap Period income shall be made with reference to the calendar year (if the Plan Year is not the calendar year).

(ii) For the 1987 calendar year only, income shall be calculated on a reasonable and consistent basis; provided, however, if there is a loss allocable to the excess Before-Tax Contributions, the amount distributed shall be the excess amount adjusted to reflect such loss.

(iii) The Committee shall not be liable to any Participant or his Beneficiary, if applicable, for any losses caused by misestimating the amount of

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any Before-Tax Contributions in excess of the limitations of this Article V and any income allocable to such excess.

(b) If in any calendar year a Participant makes Before-Tax Contributions under this Plan and additional elective deferrals, within the meaning of Code Section 402(g)(3), under any other plan maintained by the Company or an Affiliated Company, and the total amount of the Participant’s elective deferrals under this Plan and all such other plans exceed the Deferral Limitation, the Company and each Affiliated Company maintaining a plan under which the Participant made any elective deferrals shall notify the affected plans in writing, and corrective distributions of the excess elective deferrals, and any income allocable thereto, shall be made from one or more such plans, to the extent determined by the Company and each Affiliated Company. The determination of the amount of a Participant’s elective deferrals for any calendar year shall be made after applying the provisions of Section 14.5 relating to certain limits on Annual Additions under Section 415 of the Code. All corrective distributions of excess elective deferrals shall be made on or before the first April 15 following the close of the calendar year in which the excess elective deferrals were made.

(c) In accordance with rules and procedures as may be established by the Committee, a Participant may submit a claim to the Committee in which he certifies in writing the specific amount of his Before-Tax Contributions for the preceding calendar year which, when added to amounts deferred for such calendar year under any other plans or arrangements described in Section 401(k), 408(k) or 403(b) of the Code (other than a plan maintained by the Company or an Affiliated Company), will cause the Participant to exceed the Deferral Limitation for the calendar year in which the deferral occurred. Any such claim must be submitted to the Committee no later than the March 1 of the calendar year following the calendar year of deferral. To the extent the amount specified by the Participant does not exceed the amount of the Participant’s Before-Tax Contributions under the Plan for the applicable calendar year, the Committee shall treat the amount specified by the Participant in his claim as a Before-Tax Contribution in excess of the Deferral Limitation for such calendar year and return such excess and any income allocable thereto to the Participant, as provided in (a) above. In the event that for any reason such Participant’s Before-Tax Contributions in excess of the Deferral Limitation

30

for any calendar year are not distributed to the Participant by the time prescribed in (a) above, such excess shall be held in the Participant’s Before-Tax Contribution Account until distribution can be made in accordance with the provisions of this Plan.

(d) To the extent required by regulations under Section 402(g) or 415 of the Code, Before-Tax Contributions with respect to a Participant in excess of the Deferral Limitation shall be treated as Annual Additions under Article XIV for the Plan Year for which the excess contributions were made, notwithstanding the distribution of such excess in accordance with the provisions of this Section.

5.7 Character of Amounts Contributed as Before-Tax Contributions.

Unless otherwise specifically provided to the contrary in this Plan, amounts deferred pursuant to a Participant’s election to make Before-Tax Contributions in accordance with Section 5.1 (and which qualify for treatment under Code Section 401(k) and are contributed to the Trust Fund pursuant to Article VI) shall be treated, for federal and state income tax purposes, as Participating Company contributions.

5.8 Rollover Contributions.

Effective as of an Eligible Employee’s Employment Commencement Date, or such later date as may be determined by the Committee, amounts, if any, distributed to such Eligible Employee or payable to such Eligible Employee from another plan that satisfies the requirements of Code Section 401(a), or held in an individual retirement account which is attributable solely to a rollover contribution within the meaning of Code Section 408(d)(3), may be transferred to this Plan, including by direct rollover from another plan that satisfies the requirements of Code Section 401(a), and credited to the Participant’s Transfer/Rollover Account in accordance with Code Section 402 and rules which the Committee shall prescribe from time to time; provided, however, the Committee determines that the continued qualification of this Plan under Code Section 401(a) or 401(k) would not be adversely affected by such transfer, or would cause this Plan to become a “transferee plan,” within the meaning of Code Section 401(a)(11). Effective January 1, 2002, amounts, if any, distributed to such Eligible Employee or payable to such Eligible Employee from (i) a qualified plan described in Section 401(a) or 403(a) of the Code (including after-tax employee contributions), (ii) an annuity contract described in Section

403(b) of the Code (excluding after-tax employee contributions), (iii) an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency

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or instrumentality of a state or political subdivision of a state, and (iv) an individual retirement account or annuity described in Section 408(a) or 408(b) of the Code that is eligible to be rolled over and would otherwise be includable in gross income, may be transferred to this Plan and credited to the Participant’s Transfer/Rollover Account in accordance with Code Section 402 and rules which the Committee shall prescribe from time to time. Any amounts transferred in accordance with this Section 5.8, which shall be in cash, shall not be subject to distribution to the Participant except as expressly provided under the terms of this Plan.

5.9 Transfer From Fisher-Price or Tyco.

An Eligible Employee who prior to April 1, 1997 has transferred employment to the Company (or other Participating Company) from Fisher-Price, Inc., and who has elected to transfer directly to this Plan his entire account balance in the Fisher-Price, Inc. Matching Savings Plan in accordance with the terms of such plan, shall be permitted to transfer such account balance directly to this Plan. The transfer must be made in cash, except that any promissory note evidencing an outstanding loan to such Eligible Employee from the Fisher-Price, Inc. Matching Savings Plan may be transferred to this Plan in kind. Any transferred promissory note shall thereafter be repayable by the Participant to the Plan in accordance with its terms. Any amounts transferred from the Fisher-Price, Inc. Matching Savings Plan shall not be subject to distribution to the Participant except as expressly provided under the terms of this Plan.

Effective as of January 1, 2007, an individual who participated in the Tyco Retirement Plan as of December 31, 2006, the date such plan was terminated, shall be permitted to elect to transfer his entire account balance under the Tyco Retirement Plan directly to this Plan; provided that the value of such account equals or exceeds $1,000 as of the date established by the Committee for such purpose. In the event such individual either (i) is an active Employee of the Company or any Affiliated Company as of December 31, 2006 or (ii) fails to make any election with respect to his Tyco Retirement Plan account, such account shall automatically be transferred directly to this Plan; provided that the value of such account equals or exceeds $1,000 as of the date established by the Committee for such purpose. In the event such transfer of assets is made on behalf of an individual, such individual shall become a Participant as provided in Section 3.8 and any amount so transferred shall be credited to such Participant’s Tyco Retirement Plan Account.

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ARTICLE VI

COMPANY CONTRIBUTIONS

6.1 General.

Subject to the requirements and restrictions of this Article VI and Article XIV, and subject also to the amendment or termination of the Plan or the suspension or discontinuance of contributions as provided herein, a Participating Company shall contribute for each Participant who is an Employee of such Participating Company, as follows:

(a) In the case of a Participating Company other than Fisher-Price, Inc., for each month of each Plan Year commencing on and after April 1, 1997 (July 1, 2003 for Employees of the American Girl, Inc. Participating Company), an amount to the Participant’s Company Contributions Account equal to a percentage of the Participant’s Compensation during such month according to the Participant’s attained age as of the last day of the preceding month, as follows:

Age as of Last Day of Preceding Month	Percentage of Compensation
Under 30	3%
30 – 39	4%
40 – 44	5%
45 – 49	6%
50 – 54	7%
55+	8%

(b) An amount to the Participant’s Before-Tax Contributions Account which is equal to the amount of the Participant’s Before-Tax Contributions pursuant to Section 5.1 and which qualify for tax treatment under Code Section 401(k).

(c) An amount to the Participant’s Company Matching Account which is the sum of the amounts in (i) and (ii) below:

(i) A dollar amount equal to the dollar amount of the first two percent (2%) of the sum of a Participant’s Before-Tax and After-Tax Contributions pursuant to Section 5.1.

(ii) A dollar amount equal to 50% of the dollar amount of the next four percent (4%) of the sum of a Participant’s Before-Tax and After-Tax Contributions pursuant to Section 5.1.

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The maximum Company Matching Contribution pursuant to this Section 6.1(c) shall be four percent (4%) of the Participant’s Compensation (such Compensation to be determined prior to reduction for Before-Tax Contributions pursuant to Section 5.1).

6.2 Requirement for Net Profits.

Contributions by a Participating Company shall be made without regard to current or accumulated profits for the year; provided, however, that the Plan is intended to be designed to qualify as a profit sharing plan for purposes of Sections 401(a) et. seq. of the Code.

6.3 Special Limitations on After-Tax Contributions and Company Matching Contributions.

With respect to each Plan Year, After-Tax Contributions and Company Matching Contributions under the Plan for the Plan Year shall not exceed the limitations on contributions on behalf of Highly Compensated Employees under Section 401(m) of the Code, as provided in this Section. For purposes of this Section, excess Before-Tax Contributions recharacterized as After-Tax Contributions after the close of a Plan Year shall be treated as After-Tax Contributions in a Plan Year as provided in Section 5.5(a)(i). In the event that After-Tax Contributions and Company Matching Contributions under this Plan on behalf of Highly Compensated Employees for any Plan Year exceed the limitations of this Section for any reason, such excess contributions and any income allocable thereto shall be disposed of in accordance with Section 6.4. For purposes of this Section 6.3, the meaning of the term “Compensation” shall be as defined in Section 5.4(b).

(a) After-Tax Contributions and Company Matching Contributions on behalf of Participants under Section 6.1(c) for a Plan Year shall satisfy the Average Contribution Percentage test set forth in (i)(A) below, or the Average Contribution Percentage test set forth in (i)(B) below:

(i)(A) The “Average Contribution Percentage” for Eligible Employees who are Highly Compensated Employees for a Plan Year shall not be more than the “Average Contribution Percentage” of all other Eligible Employees for the Comparison Year multiplied by 1.25, or

(i)(B) The excess of the “Average Contribution Percentage” for Eligible Employees who are Highly Compensated Employees for a Plan Year over the “Average Contribution Percentage” for all other Eligible Employees for the Comparison Year shall not be more than two (2)

34

percentage points, and the “Average Contribution Percentage” for Eligible Employees who are Highly Compensated Employees for a Plan Year shall not be more than the “Average Contribution Percentage” of all other Eligible Employees for the Comparison Year multiplied by 2.00.

The “Comparison Year” is the Plan Year being tested.

(ii) The Average Contribution Percentage for any Plan Year ending prior to January 1, 2002 for Highly Compensated Employees eligible to participate in this Plan and a plan of the Company or an Affiliated Company that satisfies the requirements of Section 401(k) of the Code, including, if applicable, this Plan, shall be reduced to the extent necessary to satisfy the requirements of Treasury Regulations Section 1.401(m)-2 or similar such rule. The multiple test described in Treasury Regulations Section 1.401(m)-2 shall not apply for Plan Years beginning after December 31, 2001.

(b) For purposes of this Section, “Average Contribution Percentage” means, with respect to a group of Eligible Employees for a Plan Year, the average of the “Contribution Percentage,” calculated separately for each Eligible Employee in such group. The “Contribution Percentage” for any Eligible Employee is determined by dividing the sum of After-Tax Contributions during the Plan Year and Company Matching Contributions under the Plan on behalf of each Eligible Employee for such Plan Year, by such Eligible Employee’s Compensation for such Plan Year. “Company Matching Contributions” for purposes of the Average Contribution Percentage test shall include a Company Matching Contribution only if it is allocated to the Participant’s Company Matching Contributions Account during the Plan Year and is paid to the Trust Fund by the end of the twelfth month following the close of the Plan Year. To the extent determined by the Committee and in accordance with regulations issued by the Secretary of the Treasury under Code Section 401(m)(3), the Before-Tax Contributions on behalf of an Eligible Employee and any “qualified nonelective contributions,” within the meaning of Code Section 401(m)(4)(c), on behalf of an Eligible Employee may also be taken into account for purposes of calculating the Contribution Percentage of such Eligible Employee, but shall not otherwise be taken into account. However, any

35

Company Matching Contributions taken into account for purposes of determining the Actual Deferral Percentage of an Eligible Employee under Section 5.4(a) shall not be taken into account under this Section 6.3.

(c) In the event that as of the last day of a Plan Year this Plan satisfies the requirements of Section 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of Section 410(b) of the Code only if aggregated with this Plan, then this Section 6.3 shall be applied by determining the Contribution Percentages of Eligible Employees as if all such plans were a single plan, in accordance with regulations prescribed by the Secretary of the Treasury under Section 401(m) of the Code.

(d) For the purposes of this Section, the Contribution Percentage for any Eligible Employee who is a Highly Compensated Employee under two or more Code Section 401(a) plans of the Company or an Affiliated Company to the extent required by Code Section 401(m), shall be determined in a manner taking into account the participant contributions and matching contributions for such Eligible Employee under each of such plans.

(e) The determination of the Contribution Percentage of any Participant shall be made after first applying the provisions of Section 14.5 relating to certain limits on Annual Additions under Section 415 of the Code, then applying the provisions of Section 5.6 relating to the return of Before-Tax Contributions in excess of the Deferral Limitation, then applying the provisions of Section 5.5 relating to certain limits under Section 401(k) of the Code imposed on Pre-Tax Contributions of Highly Compensated Employees, and last, applying the provisions of Section 6.5 relating to the forfeiture of Company Matching Contributions attributable to excess Before-Tax or After-Tax Contributions.

(f) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury.

(g) The Committee shall keep or cause to have kept such records as are necessary to demonstrate that the Plan satisfies the requirements of Code Section 401(m)

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and the regulations thereunder, in accordance with regulations prescribed by the Secretary of the Treasury.

6.4 Provision for Return of Excess After-Tax Contributions and Company Matching Contributions on Behalf of Highly Compensated Employees.

(a) The Committee shall determine, as soon as is reasonably possible following the close of the Plan Year, the extent (if any) to which After-Tax and Company Matching Contributions on behalf of Highly Compensated Employees may cause the Plan to exceed the limitations of Section 6.3 for such Plan Year. If, pursuant to the determination by the Committee, After-Tax and Company Matching Contributions on behalf of a Highly Compensated Employee may cause the Plan to exceed such limitations, then the Committee shall take the following steps:

(i) First, any excess After-Tax Contributions that were not matched by Company Matching Contributions, and any Non-Gap Period income allocable thereto, shall be distributed to the Highly Compensated Employee (after withholding any applicable income taxes on such amounts).

(ii) Second, if any excess remains after the provisions of (i) above are applied, to the extent necessary to eliminate the excess, Company Matching Contributions on behalf of the Highly Compensated Employee, and any Non-Gap Period income allocable thereto, shall be forfeited, to the extent forfeitable under the Plan, or distributed to the Highly Compensated Employee, to the extent non-forfeitable under the Plan (after withholding any applicable income taxes on such amounts). Any corresponding After-Tax Contributions, and any Non-Gap Period income allocable thereto, shall be distributed to the Highly Compensated Employee (after withholding any applicable income taxes on such amounts).

(iii) If administratively feasible, excess After-Tax Contributions and Company Matching Contributions which are nonforfeitable under the Plan, including any Non-Gap Period income allocable thereto, shall be distributed to Highly Compensated Employees, or, to the extent forfeitable, forfeited, within two and one-half (2 ¹/2) months following the close of the Plan Year for which the excess Contributions were made, but in any event no later than the end of the first Plan Year following the Plan Year for which the excess Contributions were

37

made, notwithstanding any other provision in this Plan. Amounts of excess Company Matching Contributions forfeited by Highly Compensated Employees under this Section, including any income allocable thereto, shall be applied, to the maximum extent practicable, to reduce Company Matching Contributions for the Plan Year for which such excess Contributions were made and thereafter shall be applied as soon as possible to reduce Company Matching Contributions for succeeding Plan Years.

(b) The Committee shall determine the amount of any excess After-Tax Contributions and Company Matching Contributions made by or on behalf of Highly Compensated Employees for a Plan Year by application of the leveling method set forth in Treasury Regulation Section 1.401(m)–1(e)(2) under which the Contribution Percentage of the Highly Compensated Employee who has the highest such Contribution Percentage for such Plan Year is reduced, to the extent required (i) to enable the Plan to satisfy the Average Contribution Percentage test, or (ii) to cause such Highly Compensated Employee’s Contribution Percentage to equal the Contribution Percentage of the Highly Compensated Employee with the next highest Contribution Percentage. The distribution or forfeiture (as the case may be) of any excess After-Tax Contributions or Company Matching Contributions shall be made on the basis of dollar amounts (rather than the individual Contribution Percentages) of the After-Tax Contributions and Company Matching Contributions by Highly Compensated Employees beginning with the highest such amounts.

(c) For purposes of satisfying the Average Contribution Percentage test, Non-Gap Period income allocable to a Participant’s excess After-Tax Contributions or Company Matching Contributions, as determined under (b) above, shall be determined by applying procedures comparable to those provided under Section 5.5.

(d) To the extent required by regulations under Section 414(m) or 415 of the Code, any excess After-Tax Contributions or matching Company Contribution forfeited by or distributed to a Highly Compensated Employee in accordance with this Section shall be treated as an Annual Addition under Article XIV for the Plan Year for which the excess contribution was made, notwithstanding such forfeiture or distribution.

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6.5 Forfeiture of Company Matching Contributions Attributable to Excess Deferrals or Contributions.

To the extent any Company Matching Contributions allocated to a Participant’s Company Matching Contributions Account are attributable to excess Before-Tax Contributions required to be distributed to the Participant in accordance with Section 5.5 or 5.6, or excess After-Tax Contributions required to be distributed to the Participant in accordance with Section 6.4, such Company Matching Contributions, including any Non-Gap Period income allocable thereto, shall be forfeited, notwithstanding that such Company Matching Contributions may otherwise be nonforfeitable under the terms of the Plan. Any Company Matching Contributions forfeited by a Participant in accordance with this Section 6.5 shall be applied to reduce Company Matching Contributions.

6.6 Investment and Application of Plan Contributions.

(a) Subject to the provisions of Section 4.1(b), all contributions to the Trust Fund under Section 6.1 (including Before-Tax Contributions) and Participant After-Tax Contributions under Section 5.1 shall be invested as provided in this Section 6.6, subject to such rules as the Committee may adopt, in its sole discretion, to implement the provisions of this Section 6.6. The Committee may establish a choice of investment alternatives for Accounts from which each Participant may select in determining the manner in which his Account will be invested. In its sole discretion, the Committee may establish an investment alternative consisting of Company Stock. If investment alternatives are established in accordance with this Section 6.6, the following provisions of this Section 6.6 shall apply, including, in the event the Committee establishes a Company Stock alternative, the limitations of (iv) below and the provisions of Article X relating to investments in Company Stock.

(i) A Participant may elect at any time to change an investment election with respect to the allocation of future contributions made by him or on his behalf (such election to apply to all such contributions without regard to any distinction between Company contributions or Participant contributions) among the investment alternatives. The Committee may require at least thirty (30) days notice prior to the commencement of the payroll period for which such change is

39

to be effective. Any such election shall be made in any whole percentage, subject to the provisions of Subsection (iv) below.

(ii) Separate Trust Fund Subaccounts shall be established for each investment alternative selected by a Participant, and each such Subaccount shall be valued separately.

(iii) A Participant may elect at any time to change the investment of his Accounts and reallocate such Accounts among the investment alternatives in any whole percentage, subject to the limitations of this paragraph and (iv) below. Subject to such rules as the Committee may prescribe, any such election to change shall be effective as soon as practical following receipt of the Participant’s election. Any such change shall be implemented by the Committee in accordance with practices and procedures established by the Committee to provide for the orderly liquidation and/or purchase of investments. Notwithstanding the foregoing, the Company may restrict the frequency or timing of trades in or out of one or more investment alternatives by a Participant, to the extent the Committee deems necessary or appropriate.

(iv) If a Company Stock alternative is established by the Committee, each Participant may elect to invest up to a maximum of twenty-five percent (25%) (fifty percent (50%) prior to April 3, 2006) of contributions made by him or on his behalf (such limitation to apply to all contributions without regard to any distinction between Company contributions and Participant contributions) in the Company Stock alternative in accordance with this Section 6.6. Such a Participant may also elect to transfer amounts from his Accounts held in other investment alternatives to the Company Stock alternative in accordance with this Section 6.6, provided, however, that no such transfer shall be implemented to the extent that such transfer would result in the value of the Participant’s interest in the Company Stock Fund exceeding twenty-five percent (25%) (fifty percent (50%) prior to April 3, 2006) of the value of his interest in all investment alternatives held under the Plan. Notwithstanding the preceding sentence, neither the Company nor the Committee, nor any representative of the Company, the Committee or of the Plan shall have any obligation to monitor the value of a

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Participant’s interest in the Company Stock Fund, or to manage said fund, and no person shall or shall have any authority to dispose of any Participant’s interest in the Company Stock Fund except in accordance with a Participant’s valid election or otherwise in accordance with express provisions of this Plan.

(v) In the case of a Participant who fails to make an effective election, for any reason whatsoever, as to how all or any portion of his interest therein shall be invested, the Committee shall prescribe rules which shall require that the Accounts of such Participant be invested in the stable asset fund.

6.7 Irrevocability.

A Participating Company shall have no right or title to, nor interest in, the contributions made to the Trust Fund, and no part of the Trust Fund shall revert to the Participating Company except that on and after the Effective Date funds may be returned to a Participating Company as follows:

(a) In the case of a Participating Company contribution which is made by a mistake of fact, that contribution may be returned to the Participating Company within one (1) year after it is made.

(b) All contributions to the Trust Fund are conditioned on deductibility under Code Section 404. In the event deduction is disallowed for any such contribution, such contribution may be returned to the Participating Company.

6.8 Company, Committee and Trustee Not Responsible for Adequacy of Trust Fund.

The Company, Committee and Trustee shall not be liable or responsible for the adequacy of the Trust Fund to meet and discharge any or all payments and liabilities hereunder. All Plan benefits will be paid only from the Trust assets, and neither the Company, the Committee nor the Trustee shall have any duty or liability to furnish the Trust with any funds, securities or other assets except as expressly provided in the Plan. Except as required under the Plan or Trust or under Part 4 or Title I of ERISA, the Company shall not be responsible for any decision, act or omission of the Trustee, the Committee, or the Investment Manager (if applicable), and shall not be responsible for the application of any moneys, securities, investments or other property paid or delivered to the Trustee.

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ARTICLE VII

PARTICIPANT ACCOUNTS AND ALLOCATIONS

7.1 General.

(a) All contributions under this plan shall be held in the Trust Fund.

(b) All gains, losses, dividends and other property acquisitions and/or transfers that occur with respect to the Trust Fund shall be held, charged, credited, debited or otherwise accounted for under said fund on an unallocated basis until allocated to Participants’ Accounts as of a Valuation Date as provided under this Plan or otherwise used or applied in accordance with the provisions of this Plan.

7.2 Participants’ Accounts.

In order to account for the allocated interest of each Participant in the Trust Fund, there shall be established and maintained the Accounts described in Section 2.1.

7.3 Revaluation of Participants’ Accounts.

As of each Valuation Date, the Accounts of each Participant shall be revalued so as to reflect a proportionate share in any increase or decrease in the fair market value of the assets in the Trust Fund as of that date as compared with the value of the assets in the Trust Fund as of the immediately preceding Valuation Date. The valuation and allocation provisions of this Section 7.3 shall be applied and implemented in accordance with the following rules:

(a) As of each Valuation Date the Accounts holding such assets shall be revalued so as to reflect to each such Account a proportionate share in the net income or loss of the assets since the immediately preceding Valuation Date.

(b) The Company, Committee and Trustee do not in any manner or to any extent whatsoever warrant, guarantee or represent that the value of a Participant’s Accounts shall at any time equal or exceed the amount previously contributed thereto.

7.4 Treatment of Accounts Following Termination of Employment.

Following a Participant’s termination of employment, pending distribution of the Participant’s Distributable Benefit pursuant to the provisions of Article VIII below, the Participant’s Plan Accounts shall continue to be maintained and accounted for in accordance with all applicable provisions of this Plan.

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7.5 Accounting Procedures.

The Committee and the Trustee shall establish accounting procedures for the purpose of making the allocations, valuations and adjustments to Participants’ Accounts provided for in this Article VII. From time to time the Committee and Trustee may modify such accounting procedures for the purpose of achieving equitable, nondiscriminatory, and administratively feasible allocations among the Accounts of Participants in accordance with the general concepts of the Plan and the provisions of this Article VII.

ARTICLE VIII

VESTING; PAYMENT OF PLAN BENEFITS

8.1 Vesting.

Each Participant’s vested interest in his Accounts shall be determined as follows:

(a) Each Participant shall at all times be one hundred percent (100%) vested in his Before-Tax Contributions Account, his After-Tax Contributions Account and his Transfer/Rollover Account under the Plan.

(b) Except as otherwise provided in this Section 8.1, each Participant shall become vested in his Company Matching Account and his Company Contributions Account as follows (the “3-Year Vesting Schedule”):

Number of Years of Service	Vesting Percentage
Less than 3	0%
3 or more	100%

provided, however, if the Participant was eligible to participate in the Plan before April 1, 2000 and has two (2) Years of Service as of April 1, 2000, the 3-Year Vesting Schedule shall be modified as follows:

Number of Years of Service	Vesting Percentage
Less than 2	0%
2	25%
3 or more	100%

Notwithstanding the foregoing, if the Participant participated in the Plan before April 1, 2000 and is not an Employee on April 1, 2000, the Participant’s vested interest

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(if any) in his Company Matching Account and his Company Contributions Account shall be determined under the following table (the “5-Year Vesting Schedule”):

Number of Years of Service	Vesting Percentage
Less than 2	0%
2	25%
3	50%
4	75%
5 or more	100%

The 3-Year Vesting Schedule shall not apply to such Participant until such Participant resumes employment as an Employee after April 1, 2000, in which event:

(i) The 3-Year Vesting Schedule shall apply to the portion of his Company Matching Account and his Company Contributions Account that is attributable to his post-March 31, 2000 participation in the Plan (if any); and

(ii) The 3-Year Vesting Schedule shall apply to the remainder of his Company Matching Account and his Company Contributions Account only (A) if the 5-Year Vesting Schedule had not been applied to forfeit any of his Company Matching Account or his Company Contributions Account prior to his resumption of employment or (B) if the 5-Year Vesting Schedule had been so applied, there has been a restoration of the resulting forfeited amount pursuant to Section 8.15(b) following his resumption of employment.

(c) Notwithstanding the foregoing, each Participant who completed an Hour of Service prior to July 1, 1989 shall at all times be one hundred percent (100%) vested in his Company Contributions Account.

(d) Additionally a Participant shall become one hundred percent (100%) vested in his Company Matching Account and his Company Contributions Account upon attainment of Normal Retirement Date while an Employee, or in the event of death or Total and Permanent Disability while an Employee.

(e) Notwithstanding the foregoing, each Participant shall at all times be one hundred percent (100%) vested in the

account(s) noted in the following chart if the Participant was eligible to participate in the corresponding plan (or was employed at the corresponding division or facility) as of the corresponding date:

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Plan Name/Division Location	Date	Account
F-P Savings Plan	3/31/97	Company Matching Account
Tyco Plan	1/1/98	Tyco Before-Tax Contributions Account
Print Paks Plan	1/31/99	Print Paks Before-Tax Contributions Account
Fort Wayne Plan	12/14/00	Fort Wayne Before-Tax Contributions Account Fort Wayne Matching Account Fort Wayne Nonelective Account
Pleasant Plan	9/30/01	Pleasant Plan Nonelective Contributions Account
Mattel-Customer Care Center; Phoenix, Arizona division	3/27/01	Company Matching Account Company Contributions Account
Mattel operations-Murray division	4/3/01	Company Matching Account Company Contributions Account
Mattel-Hebron, Kentucky division	4/24/01	Company Matching Account Company Contributions Account
Eau Claire, Wisconsin facility of American Girl, Inc.	1/1/04	Company Matching Account Company Contributions Account
Mount Laurel, NJ facility	1/1/04	Company Matching Account Company Contributions Account
Tyco Retirement Plan	1/1/07	Tyco Retirement Account

8.2 Distribution Upon Retirement.

(a) A Participant may retire from the employment of the Company on his Normal Retirement Date. Subject to the required distribution rules under (b) below, if the Participant continues in the service of the Company beyond his Normal Retirement Date, he shall continue to participate in the Plan in the same manner as Participants who have not reached their Normal Retirement Dates. At the subsequent termination of the Participant’s employment on his late retirement date, his Distributable Benefit shall be based upon the value of his Accounts as of the applicable Valuation Date determined

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with reference to the date of distribution. After a Participant has reached his Normal Retirement Date, any termination of the Participant’s employment (other than by reason of death or disability) shall be deemed a Normal Retirement.

(b) Upon Normal Retirement a Participant shall be entitled to a distribution of his Distributable Benefit in the Trust Fund. Subject to the provisions of Section 8.19 (regarding the cash out of small amounts), such distribution shall be made or commence to be made as soon as practicable following the date specified by the Participant in a written election filed with the Plan Administrator; provided that, in no event shall distribution be delayed beyond the time specified in Section 8.5(a) in accordance with the requirements of Code Section 401(a)(9).

(c) During the Participant’s lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:

(i) the quotient obtained by dividing the Participant’s account balance by the distribution period in the Uniform Lifetime Table set forth in U.S. Treasury Regulations section 1.401(a)(9)-9, using the Participant’s age as of the Participant’s birthday in the first distribution calendar year; or

(ii) if the Participant’s sole designated Beneficiary for the distribution calendar year is the Participant’s spouse, the quotient obtained by dividing the Participant’s account balance by the number in the Joint and Last Survivor Table set forth in U.S. Treasury Regulations section 1.401(a)(9)-9, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the first distribution year.

Required minimum distributions will be determined under this Section 8.2(c) beginning with the first distribution calendar year and continue through the end of the distribution calendar year that includes the Participant’s date of death; provided that life expectancies shall not be recalculated each year but shall be determined by taking the life expectancy in the first distribution calendar year reduced by one for each subsequent year.

8.3 Distribution Upon Death Prior to Termination of Employment.

(a) Upon the death of a Participant during his employment, the Committee shall direct the Trustee to make a distribution of the Participant’s Distributable Benefit in

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the Trust Fund in a single lump sum to the Beneficiary designated by the deceased Participant, or as otherwise determined under Section 8.9.

(b) If the Participant’s Beneficiary is not the Participant’s surviving spouse, such death benefits shall be distributed to the non-spouse Beneficiary as soon as administratively feasible following the Participant’s death. If the Participant’s surviving spouse is the Participant’s sole designated Beneficiary, such death benefits shall be distributed to the surviving spouse Beneficiary at such time as the Beneficiary elects, but not later than December 31 of the calendar year immediately following the calendar year in which the Participant died, or if later, December 31 of the calendar year in which the Participant would have attained age 70 ¹/2.

If there is no designated Beneficiary of a deceased Participant as of September 30 of the year following the year of the Participant’s death, all death benefits payable with respect to the deceased Participant shall be distributed no later than December 31 of the calendar year containing the fifth anniversary of the Participant’s death. The “designated Beneficiary” of a Participant for purposes of this Section 8.3 and Section 8.4 shall mean the individual who is designated as the Participant’s Beneficiary under Section 8.9 and who satisfies the requirements to constitute a designated beneficiary under

Code Section 401(a)(9) and U.S. Treasury Regulations section 1.401(a)(9)-1, Q&A-4.

8.4 Death After Termination of Employment.

(a) Upon the death of a former Participant after his retirement or other termination of employment, but prior to the distribution of the Participant’s Distributable Benefit in the Trust Fund to which he is entitled, the balance of the Distributable Benefit to which the Participant was entitled shall be distributed to the Participant’s Beneficiary as provided in Section 8.3.

(b) If the Participant dies on or after the date distributions begin, all death benefits calculated in accordance with Section 8.4(a) shall be paid to the designated Beneficiary, or as otherwise determined under Section 8.9, as soon as administratively practicable following the Participant’s death.

8.5 Termination of Employment.

(a) Subject to the provisions of Section 8.5(b) and Section 8.19 (regarding the cash out of small amounts), effective as of January 1, 2006, if a Participant’s employment

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for the Company and all Affiliated Companies terminates prior to his Normal Retirement Date, his Distributable Benefit in the Trust Fund shall be paid as soon as administratively feasible following any date specified by the Participant in a written election filed with the Plan Administrator ; provided that, distribution shall begin to be made in accordance with Section 8.2(c) to a Participant who is not a “5-percent owner” (within the meaning of Section 401(a)(9) of the Code) no later than April 1 of the calendar year following the later of the calendar year in which the Participant (A) attains age seventy and one-half (70 ¹/2) or (B) separates from service with the Company or an Affiliated Company. Notwithstanding the foregoing, in the case of a Participant who is a “5-percent owner” (within the meaning of Section 401(a)(9) of the Code) distribution shall be made or commence to be made not later than April 1 following the calendar year in which such Participant attains age 70 ¹/2, whether or not the Participant’s employment has terminated.

(b) If the Participant makes a valid written election in accordance with (c) below, payment of his Distributable Benefit pursuant to this Section 8.5 may be made on any date which is not later than sixty (60) days after the close of the Plan Year in which occurs the later of (i) the Participant’s termination of employment with the Company and all Affiliated Companies, or (ii) a date specified by the Participant in the valid written election filed by the Participant, to the extent administratively feasible. For purposes of Section 72(t) of the Code, any distribution to a Participant in accordance with this Section 8.5 during or following the year in which he attains age fifty-five (55) shall be deemed to be on account of an event enumerated in Code Section 72(t)(2).

(c) Any written election by a Participant to receive payment of his Distributable Benefit shall not be valid unless such election is made both (A) after the Participant receives a written notice advising him of his right to defer payment and (B) within the ninety (90) day period ending on the Participant’s “Benefit Starting Date.” The notice to the Participant advising him of his right to defer payment shall be given no less than thirty (30) nor more than ninety (90) days prior to the Participant’s Benefit Starting Date. For purposes of this Subsection (c), “Benefit Starting Date” shall mean the first day of the first period for which the Participant’s Distributable Benefit is paid. Notwithstanding the foregoing, payment of the Participant’s Distributable Benefit may

48

commence less than thirty (30) days after receipt of the notice, provided that the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect to receive payment and the Participant, after receiving the notice, affirmatively elects to receive payment.

(d) In the event a Participant is not fully vested in all of his Company Contributions Account or Company Matching Account under the Plan, the portion of such Accounts which is not vested shall be forfeited as of the earlier of the date the vested portion of such Accounts is completely distributed to him or the date he incurs five (5) consecutive one-year Periods of Severance.

(e) Notwithstanding the foregoing, if a Participant ceases to be an Employee by reason of the disposition by the Company or an Affiliated Company of either (i) substantially all of the assets used by the Company or an Affiliated Company, as the case may be, in a trade or business, or (ii) the interest of the Company or an Affiliated Company, as the case may be, in a subsidiary, such Participant shall be entitled to distribution of his Distributable Benefit as if, for purposes of this Plan only, such event constitutes a termination of employment.

8.6 Withdrawals.

(a) Subject to the succeeding provisions of this Section 8.6, while he is still an Employee, a Participant may withdraw amounts from his Accounts under the Plan; provided, however, a withdrawal must be for at least $200 (or the entire amount available for withdrawal, if less). A withdrawal other than on account of Hardship shall be made from the Participant’s Accounts in the following order, in each case up to the amount available for withdrawal in such Accounts (i) After-Tax Contributions Account; (ii) Transfer/Rollover Account; and (iii) Company Matching Account. Payment of a withdrawal shall be made in cash and shall be allocated pro rata among the Participant’s investment fund subaccounts, including any Company Stock subaccount. In no event may any amount be withdrawn by a Participant after he ceases to be an Employee.

(b) A withdrawal from a Participant’s Transfer/Rollover Account may be made in accordance with rules of uniform application which the Committee may from time to time prescribe; provided, however, that, except in the case of a Participant who is

49

determined to have a Total and Permanent Disability and who is ineligible to make further contributions under Section 5.1, no amount representing Employee contributions made within the preceding six months to the Mattel Investment Plan which were matched by Company matching contributions under said Plan may be withdrawn from such Account; and provided further, that unless the Participant has completed an aggregate of at least sixty (60) months of participation in this Plan and the Mattel Investment Plan as of the date of withdrawal or has attained age 59 ¹/2 or is determined by the Committee to have a Total and Permanent Disability, the withdrawal shall not include amounts attributable to Company contributions made under the Mattel Investment Plan within the two (2) year period preceding withdrawal.

(c) A withdrawal from a Participant’s After-Tax Contribution Account may be made in accordance with rules of uniform application which the Committee may from time to time prescribe; provided, however, that except in the case of a Participant who is determined to have a Total and Permanent Disability and who is ineligible to make further contributions under Section 5.1, no amount representing After-Tax Contributions made within the preceding six months to the Plan which were matched by Company Matching Contributions may be withdrawn from such Account.

(d) A withdrawal from a Participant’s Before-Tax Contributions Account may be made in accordance with rules of uniform application which the Committee may from time to time prescribe; provided, however, that no Participant may make a withdrawal from his Before-Tax Contributions Account prior to attaining age 59 ¹/2, or a determination by the Committee that such Participant has a Total and Permanent Disability or that the withdrawal is necessary to relieve a hardship of the Participant or his family. A Participant may receive a withdrawal due to hardship only if the withdrawal both is made due to an immediate and heavy financial need of the Participant within the meaning of (i) below and is necessary to satisfy such financial need within the meaning of (ii) below.

(i) For purposes of this Section 8.6(d), a withdrawal will be considered to be on account of an immediate and heavy financial need of the Participant only if the withdrawal is for:

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(A) Expenses for (or necessary to obtain) medical care that would be deductible under Code Section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);

(B) Costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments);

(C) Payment of tuition, related educational fees, and room and board expenses for up to the next 12 months of post-secondary education for the Participant, or his Spouse, children, or dependents (as defined Code Section 152 without regard to Section 152(b)(1), (b)(2) and (d)(1)(B);

(D) Payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage on such residence;

(E) Payments for burial or funeral expenses for the Participant’s deceased parent, spouse, children or dependents (as defined in Code Section 152 without regard to Section 152(d)(1)(B);

(F) Expenses for the repair of damage to the Participant’s principal residence that would qualify for the casualty deduction under Code Section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income; or

(G) Such other deemed immediate and heavy financial needs as are set forth by the Internal Revenue Service through the publication of revenue rulings, notices, and other documents of general applicability.

(ii) For purposes of this Section 8.6(d), a distribution shall be considered to be necessary to satisfy an immediate and heavy financial need of the Participant only if all of the following conditions are satisfied: (A) the distribution is not in excess of the amount of the immediate and heavy financial need of the Participant, which may include amounts necessary to pay federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution; (B) the Participant has obtained all distributions (other than hardship distributions) and all non-taxable loans (at the time of the loan) currently available under all plans maintained by the Company; and (C) the Participant’s Before-Tax

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Contributions and After-Tax Contributions to the Plan and employee contributions under all qualified and non-qualified plans of deferred compensation maintained by the Company, including a stock option, stock purchase, or similar plan, or a cash-or-deferred arrangement that is part of a cafeteria plan (within the meaning of Code Section 125), will be suspended under the terms of each such plan, or in accordance with the terms of an otherwise legally enforceable agreement, for six (6) months (twelve (12) months prior to January 1, 2002) following the receipt of the hardship distribution.

Notwithstanding the foregoing, the amount of any hardship withdrawal shall not exceed a Participant’s ‘distributable amount,’ which consists of the total of such Participant’s Before-Tax Contributions as of the date of the hardship withdrawal, including earnings credited thereon before December 31, 1988 (if any), reduced by the amount of any previous hardship withdrawals. The Committee will determine whether a hardship withdrawal satisfies the foregoing standards in a uniform and nondiscriminatory manner consistent with Code Section 401(k) and the regulations promulgated thereunder.

(e) A withdrawal from a Participant’s vested interest in his Company Contributions Account may be made in accordance with rules of uniform application which the Committee may from time to time prescribe; provided, however, that no participant may withdraw from his Company Contributions Account prior to attaining age 59 ¹/2 or a determination by the Committee that such Participant has a Total and Permanent Disability or that the withdrawal is necessary to relieve a hardship of the Participant or his family within the meaning of Section 8.6(d) of the Plan.

(f) A withdrawal from the vested portion of a Participant’s Company Matching Account may be made in accordance with rules of uniform application which the Committee may from time to time prescribe; provided, however, that unless the Participant has completed an aggregate of at least sixty (60) months of participation in this Plan and the Mattel Investment Plan, the F-P Savings Plan, the Tyco Plan, the PrintPaks Plan or the Pleasant Plan as of the date of withdrawal or has attained age 59 ¹/2 or is determined by the Committee to have a Total and Permanent Disability, any withdrawal from such Company Matching Account shall not include amounts attributable to Company contributions made within the two (2) year period preceding withdrawal.

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(g) Notwithstanding anything in this Article to the contrary, a Participant can elect to receive all or any portion of his vested Accounts once such Participant attains age 70 ¹/2.

(h) If a Participant makes an in-service withdrawal from his Company Contributions Account or Company Matching Account at a time when the Participant does not have a one hundred percent (100%) vested interest in the value of such Account, and the Participant may increase his vested interest in the Account:

(i) such account shall be established as a separate Account as of the date of distribution, and

(ii) at any relevant time the Participant’s vested interest in the value of such separate Account shall be equal to an amount (“X”) determined by the formula:

X = P (AB + D) – D

For purposes of applying the formula above: P is the nonforfeitable percentage at the relevant time, AB is the Account balance at the relevant time, and D is the amount of the withdrawal.

(i) Disbursement of withdrawals shall be as soon as administratively practicable after the submission of a request for withdrawal in form satisfactory to the Committee.

8.7 Form of Distribution.

(a) Unless a Participant makes a written election in accordance with Section 8.7 (c) or 8.8 below, a Participant’s Distributable Benefit shall be payable in the form of a single sum distribution. Except for any portion of such Distributable Benefit that is payable in the form of Company Stock in accordance with Section 8.13, such distribution shall be in cash.

(b) In the case of any cash disbursement from a Participant’s Accounts, such disbursement shall be made ratably from such investment funds or investment vehicles in which such Participant’s Accounts affected by such disbursement are invested.

(c) Subject to Section 8.19 regarding the payment of small Accounts, effective April 1, 1997, a Participant who terminates employment on or after his Normal Retirement Date, Early Retirement Date or by reason of Total and Permanent Disability

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and, effective January 1, 2007, any Participant whose vested Account at the time of termination of employment exceeds fifty thousand dollars ($50,000), may elect to receive his benefit in installments payable monthly, quarterly or annually for a period of five, ten or fifteen years (but no longer than the Participant’s life expectancy determined as of his Benefit Starting Date). All such installments shall be paid in cash or Company Stock and the installment or installments for the year in which the Participant attains age 70 ¹/2 and all subsequent years shall be paid to the Participant on or before December 31 of such year.

8.8 Election for Direct Rollover of Distributable Benefit to Eligible Retirement Plan.

(a) To the extent required by Section 401(a)(31) of the Code, a Participant who is eligible to receive payment of his Distributable Benefit shall be entitled to elect a direct rollover of all or part of his Distributable Benefit. For purposes of this Section, an “eligible retirement plan” shall mean any plan described in Code Section 402(c)(8)(B), including an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred to such plan from the Plan, the terms of which permit the acceptance of a direct rollover from a qualified plan. The portion of a Participant’s Distributable Benefit consisting of after-tax contributions which are not includible in income shall be eligible for a direct rollover in accordance with the provisions of this Section. However, such portion may be transferred only to an individual retirement account or annuity described in Section 408(a) or (b) of the Code, or to a qualified defined contribution plan described in Section 401(a) or 403(a) of the Code, that agrees to separately account for amounts so transferred, including separately accounting for the portion of such Distributable Benefit which is includible in gross income and the portion of such Distributable Benefit which is not so includible in gross income.

(b) A Participant’s direct rollover election under this Section shall be in writing and shall be made in accordance with rules and procedures established by the Committee. Such election shall specify the dollar or percentage amount of the Distributable Benefit to be rolled over, the name of the eligible retirement plan selected

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by the Participant, and such additional information as the Committee deems necessary or appropriate in order to implement the election. It shall be the Participant’s responsibility to confirm that the eligible retirement plan designated in his direct rollover election will accept the direct rollover of his Distributable Benefit. The Committee shall be entitled to direct the rollover based on its reasonable reliance on information provided by the Participant, and shall be not required to independently verify such information, unless it is clearly unreasonable not to do so.

(c) At least thirty (30) days, but not more than ninety (90) days, prior to the date a Participant’s Distributable Benefit becomes payable, the Participant shall be given written notice of any right he may have to elect a direct rollover of the taxable portion of his Distributable Benefit to an eligible retirement plan. Notwithstanding the foregoing, a direct rollover of the Participant’s Distributable Benefit may be made less than thirty (30) days after receipt of the notice, provided that the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a direct rollover and the Participant, after receiving the notice, affirmatively elects a direct rollover.

(d) If a Participant whose Distributable Benefit is subject to mandatory distribution without the Participant’s consent in accordance with Section 8.19 fails to file a direct rollover election with the Committee within ninety (90) days after notice is given, or if the Committee cannot effect the direct rollover election within a reasonable time after the election is filed due to the failure of the Participant to take such actions as may be required by the eligible retirement plan before it will accept the direct rollover, the Participant’s Distributable Benefit shall be paid to him after withholding applicable income taxes.

(d) If a Participant has made a direct rollover election with respect to any portion of his Distributable Benefit that is payable in Company Stock, as provided in Section 8.13, unless the eligible retirement plan specified by the Participant will accept a direct rollover of such Stock, the Stock will be distributed to the Participant, notwithstanding the Participant’s direct rollover election.

(e) To the extent required by Section 401(a)(31) of the Code, if all or a portion of a Participant’s Distributable Benefit is payable to the Participant’s surviving

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Spouse, or to a former Spouse in accordance with a “qualified domestic relations order,” such surviving Spouse or former Spouse shall be entitled to elect a direct rollover of all or a portion of such distribution in accordance with the provisions of this Section.

(f) Notwithstanding the foregoing, a Participant’s direct rollover shall not include any hardship withdrawal described in Section 8.6(d) of the Plan and Code Section 401(k)(2)(B), and the Participant may not elect to have any portion of such a distribution paid directly to an eligible retirement plan.

8.9 Designation of Beneficiary.

(a) Subject to the provisions of Section 8.11, each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive his interest in the Trust Fund in the event of his death before receipt of his entire interest in the Trust Fund. The designation shall be made on a form prescribed by and delivered to the Committee.

(b) Subject to the provisions of Section 8.11, a Participant shall have the right to change or revoke any such Beneficiary designation by filing a new designation or notice of revocation with the Committee. Subject to the provisions of Section 8.11, no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation.

(c) If (i) a Participant who is married designates the Participant’s spouse as the Participant’s Beneficiary or (ii) a Participant who is registered as a domestic partner or has obtained a civil union license with another individual (in either event, such individual is hereafter referred to as the Participant’s “Domestic Partner”) designates the Participant’s Domestic Partner as the Participant’s Beneficiary, and subsequent to such designation the Participant and the Participant’s spouse are divorced or the relationship between the Participant and the Participant’s Domestic Partner is legally dissolved, the designation of the Participant’s spouse or Domestic Partner as the Participant’s Beneficiary (as the case may be) shall become void and shall have no further legal force or effect from and after such divorce or dissolution. Should the Participant wish to designate a former spouse or Domestic Partner as his Beneficiary, he must affirmatively do so by completing a new Beneficiary designation form, after the date of his divorce or dissolution, naming his former spouse or Domestic Partner as his Beneficiary.

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(d) If a deceased Participant shall have failed to designate a Beneficiary, the Company shall be unable to locate a designated Beneficiary after reasonable efforts have been made, for any reason the designation shall be legally ineffective, or the Participant’s Beneficiary shall have predeceased the Participant, then and in such event, the deceased Participant’s estate shall be the deceased Participant’s Beneficiary.

(e) In the event that the deceased Participant was not a resident of California at the date of his death, the Committee, in its discretion, may require the establishment of ancillary administration in California.

8.10 Facility of Payment.

If any payee under the Plan is a minor or if the Committee reasonably believes that any payee is legally incapable of giving a valid receipt and discharge for any payment due him, the Committee may have the payment, or any part thereof, made to the person (or persons or institution) whom it reasonably believes is caring for or supporting the payee, unless it has received due notice of claim therefor from a duly appointed guardian or committee of the payee. Any payment shall be a payment from the Accounts of the payee and shall, to the extent thereof, be a complete discharge of any liability under the Plan to the payee.

8.11 Requirement of Spousal Consent.

Notwithstanding any Beneficiary designation submitted by a Participant, any distribution required to be made under the terms of the Plan by reason of the death of the Participant shall be paid in full to the Participant’s surviving spouse, unless there is no surviving spouse or the spouse consents in writing to the beneficiary designation, acknowledging the effect of the election. Any such spousal consent, to be valid, must be witnessed by a plan representative or a notary public. The spousal consent requirement of this Section 8.11 shall be waived and the Participant’s Beneficiary designation shall be made effective if the Participant establishes to the satisfaction of the Committee that the required consent cannot be obtained because there is no spouse or the spouse cannot be located.

8.12 Additional Documents.

(a) The Committee or Trustee, or both, may require the execution and delivery of such documents, papers and receipts as the Committee or Trustee may determine necessary or appropriate in order to establish the fact of death of the deceased

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Participant and of the right and identity of any Beneficiary or other person or persons claiming any benefits under this Article VIII.

(b) The Committee or the Trustee, or both, may, as a condition precedent to the payment of death benefits hereunder, require an inheritance tax release and/or such security as the Committee or Trustee, or both, may deem appropriate as protection against possible liability for state or federal death taxes attributable to any death benefits.

8.13 Company Stock Distribution.

Payment of any portion of a Participant’s Distributable Benefit held in his Company Stock subaccount shall be paid in cash, unless the Participant elects in writing in accordance with procedures established by the Committee that payment shall be made in Company Stock in lieu of cash (which election may apply to a payment to the trustee of an “eligible retirement plan” in accordance with Section 8.8 but may not apply with respect to a withdrawal in accordance with Section 8.6). Within a reasonable period of time prior to the date such Participant’s Distributable Benefit is to be paid, the Committee shall notify the Participant of his right to elect to have payment of the value of his Company Stock subaccount made in the form of a Company Stock distribution in lieu of a cash distribution. Upon being so notified, the Participant shall have a reasonable time (at least thirty (30) days) in which to file a written election to have such payment made in Company Stock. Any such election shall be irrevocable. If a Participant fails to file a written election to receive an in kind payment of the value of the portion of his Distributable Benefit attributable to his Company Stock subaccount within thirty (30) days of receiving notification, payment shall be made in cash based on the value of such Company Stock as of the immediately following Valuation Date at the then prevailing purchase price. Neither the Company, the Committee, nor the Trustee shall be required to time the distribution or sale of Company Stock to anticipate fluctuations in the purchase price.

8.14 Valuation of Accounts.

(a) For purposes of determining a Participant’s Distributable Benefit under this Plan, the value of a Participant’s Accounts shall be determined in accordance with rules prescribed by the Committee, subject, however, to the following provisions:

(i) Unless the provisions of (ii) below apply, if a Participant’s employment terminates for any reason other than death, the value of a Participant’s Accounts shall be determined as of the Valuation Date coinciding

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with or next following the date on which a properly completed application for payment or transfer of the Participant’s Distributable Benefit, and such other forms as may be required by the Committee in order to process the distribution or transfer, are received by the Committee.

(ii) If a Participant’s employment terminates for any reason other than death and the Committee does not receive the Participant’s properly completed application for the payment or transfer of the Participant’s Distributable Benefit, and such other forms as may be required by the Committee to process the payment or transfer, and the vested value of such Participant’s Accounts at the applicable Valuation Date does not exceed $1,000, including that portion of the Participant’s Distributable Benefit that is attributable to the Participant’s Transfer/Rollover Account, or, prior to March 28, 2005, such value does not exceed $5,000 excluding that portion of the Participant’s Distributable Benefit that is attributable to the Participant’s Transfer/Rollover Account, then, in either of such events, the applicable Valuation Date shall be the Valuation Date coinciding with or next following the expiration of a reasonable period of time after the Participant is furnished with such application and forms, including any tax notice required under Code Section 402(f).

(ii) In the case of a Participant’s death, the value of a Participant’s Accounts for purposes of determining the Participant’s Distributable Benefit shall be determined as of the Valuation Date coinciding with or next following the date on which the Committee has been furnished with all documents and information (including but not limited to proof of death, facts demonstrating the identity and entitlement of any Beneficiary or other payee, and any and all releases) necessary to distribute such Participant’s Accounts.

(iii) In the case of any withdrawal or loan, the value of a Participant’s Accounts under the Plan shall be determined as of the Valuation Date coinciding with or next following the date on which the Participant submits a request for such withdrawal or loan in a form satisfactory to the Committee and the withdrawal or loan is approved.

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(iv) The value of a Participant’s Accounts shall be increased or decreased (as appropriate) by any contributions, forfeitures, or distributions properly allocable under the terms of this Plan to his Accounts that occurred on or after the most recent Valuation Date or for any other reason were not otherwise reflected in the valuation of his Accounts on such Valuation Date.

(b) Neither the Committee, the Company, nor the Trustee shall have any responsibility for any increase or decrease in the value of a Participant’s Accounts as a result of any valuation made under the terms of this Plan after the date of his termination of employment and before the date of the distribution of his Accounts to him. Also, neither the Committee, the Company, nor the Trustee shall have any responsibility for failing to make any interim valuation of a Participant’s Accounts between the date of distribution to the Participant of his Accounts and the applicable Valuation Date, even though the Plan assets may have been revalued in that interim for a purpose other than to revalue the Accounts under this Plan.

8.15 Forfeitures; Repayment.

(a) Amounts forfeited in accordance with Section 8.5(d) shall be applied as soon as practicable to reduce future Company contributions.

(b) A Participant who elects to receive a distribution pursuant to Subsection 8.5(b) may, in the case of his reemployment as an Eligible Employee, repay the total amount distributed and shall in such case be fully restored in amounts forfeited in accordance with Section 8.5(d); provided, however, that no such repayment shall be permitted unless such repayment is made prior to the earlier of (i) the date the Participant incurs five (5) consecutive one-year Periods of Severance and (ii) the fifth anniversary of his Employment Commencement Date following the Period of Severance.

8.16 Loans.

(a) From time to time, the Committee may adopt procedures whereby a Participant may borrow from his Accounts under the Plan. In no event may any amount be borrowed by a Participant after he ceases to be an Eligible Employee. In addition to such other requirements as may be imposed by applicable law, any such loan shall bear a reasonable rate of interest, shall be adequately secured by proper collateral, and shall be

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repaid within a specified period of time according to a written repayment schedule that calls for substantially level amortization over the term of the loan.

(b) In connection with the requirements set forth in Subsection (a) above, the Committee shall establish the applicable interest rate, which shall be reasonably equivalent to interest rates available commercially with respect to similar loans. Without prejudice to the right of any Participant and the Trustee to enter into other appropriate arrangements to secure repayment of a loan pursuant to this Section 8.16, a loan to a Participant hereunder may be secured by an interest in the Participant’s vested interest in his Accounts under this Plan. Any loan shall by its terms require repayment within five (5) years in substantially level payments made no less frequently than quarterly, except that the repayment period may be up to a maximum of fifteen (15) years in the case of a loan certified by the Participant to be used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as a principal residence of the Participant.

(c) In no event shall the principal amount of a loan hereunder, at the time the loan is made, together with the outstanding balance of all other loans to the Participant under this Plan, exceed the lesser of:

(i) fifty percent (50%) of the value of the Participant’s vested interest in his Accounts under this Plan, or

(ii) fifty thousand dollars ($50,000), reduced by the highest outstanding loan balance of the Participant from the Plan during the 1-year period ending on the day before the date on which such loan was made.

No loan less than two thousand dollars ($2,000) will be made. Unless otherwise determined by the Committee, no Participant may have more than one loan outstanding under this Plan on any date.

(d) Each Participant desiring to enter into a loan arrangement pursuant to this Section 8.16 shall apply for a loan by submitting a loan request in form satisfactory to the Committee. The Committee shall notify the Participant within a reasonable time whether the request is approved or denied. Upon approval of the request by the Committee, the Participant shall enter into a loan agreement with the Trustee. Such a Participant shall execute such further written agreements as may be necessary or appropriate to establish a

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bona fide debtor-creditor relationship between such Participant and the Trustee and to protect against the impairment of any security for said loan.

(e) Any loan made to a Participant shall be secured by a pro rata portion of his vested investment fund subaccounts, including any Company Stock subaccount. Repayments of a loan by a Participant shall be invested among the Participant’s investment fund subaccounts in accordance with the Participant’s investment election then in effect under Section 6.6(a)(i).

(f) Loans shall be repaid in accordance with the repayment schedule provided under the terms of the loan agreement. Notwithstanding the repayment schedule provided in a loan agreement, however, the amount of any outstanding loan shall be due and payable on the earlier to occur of (a) the date on which distribution is made or commences to be made of the participant’s vested interest under the Plan or (b) the expiration of one hundred eighty (180) days following the date the Participant ceases to be an Employee. Following a Participant’s Severance Date, any outstanding loan amount which has become due and payable under the foregoing rule or otherwise, and which is secured by the Participant’s vested interest in his Accounts, shall be treated as distributed from the Plan to the Participant.

(g) In the event a Participant fails to repay a loan in accordance with the terms of a loan agreement, such loan shall be treated as in default. The date of the enforcement of the security interest due to a loan in default shall be determined by the Committee, provided no loss of principal or income shall result due to any delay in the enforcement of the security interest due to the default. As of the Participant’s Severance Date, the Participant’s Distributable Benefit shall be reduced by the outstanding amount of a loan which is then in default, including any accrued interest thereon, that is secured by the Participant’s vested interest in his Accounts. Any reasonable costs related to collection of a loan made hereunder shall be borne by the Participant.

(h) To the extent required to comply with the requirements of Section 401(a)(4) of the Internal Revenue Code, loans hereunder shall be made in a uniform and non-discriminatory manner.

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8.17 Special Rule for Disabled Employees.

(a) Subsection 8.17(b) shall apply to any Participant whose active performance of services for a Participating Company has ceased by reason of disability, and who has not subsequently resumed the active performance of such services. Subsections 8.17(c) and (d) shall apply only to a Participant whose active performance of services for a Participating Company ceases prior to January 1, 1989 by reason of disability, and who has not subsequently resumed the active performance of such services.

(b) In the case of a Participant to whom this Section 8.17(b) applies, so long as such Participant continues to receive Compensation from a Participating Company, but in no event for longer than a period of six (6) months commencing with the date of such Participant’s cessation of active service, such Participant may continue to participate in this Plan in the same manner as any other Participant.

(c) In the case of a Participant to whom this Section 8.17 applied by reason of a disability prior to January 1, 1989 and who, on or after expiration of the period described in Section 8.17(b) above, commences to receive payments under the long term disability benefit coverage provided by a Participating Company and who also is determined to be suffering from a Total and Permanent Disability, contributions shall be made by the Participating Company pursuant to Section 6.1(a) (relating to contributions to Participants’ Company Contributions Accounts) with respect to the Participant’s “Compensation” as defined in Subsection 8.17(d) below, but the Participant shall not be eligible to make any contributions with respect to his own Compensation, and shall not be entitled to share in any other Participating Company contributions to the Plan (including but not limited to contributions to the Company Matching Account). Contributions by a Participating Company pursuant to this Section 8.17(c) shall be subject to amendment or termination of the Plan or other suspension or discontinuance of contributions, and in any event shall cease to be made with respect to any Participant after the earlier to occur of such Participant’s death or termination of employment for any other reason, cessation of Total and Permanent Disability, or attainment of age sixty-five (65).

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(d) In the case of a Participant to whom Section 8.17 applied by reason of a disability prior to January 1, 1989 and who is eligible to share in contributions of a Participating Company as provided in Subsection 8.17(c) above, the Compensation of such Participant for a Plan Year shall be deemed to equal the amount of Compensation which the Participant was paid (and which was taken into account for purposes of Sections 5.1 and 6.1 hereof) immediately before sustaining such Total and Permanent Disability, provided, however, that such amounts shall be included in Compensation only upon the following conditions:

(i) the Participant is not an officer, owner, or highly compensated individual (within the meaning of such terms under Code Section 415(c)(3));

(ii) the payments to such Participant under such long term disability benefit coverage shall be treated as “Compensation” only to the extent that such payments do not exceed the Participant’s wage or salary rate paid immediately before becoming disabled to an extent constituting a Total and Permanent Disability; and

(iii) the Participant’s accounts under the Plan, to the extent attributable to contributions made during a period of Total and Permanent Disability shall be nonforfeitable.

(e) For purposes of this Plan, a Participant shall not be deemed to have terminated employment prior to his ceasing to be eligible for contributions under this Section 8.17, and upon such cessation of eligibility shall be deemed to have terminated employment only if he did not then begin or recommence employment for the Company or an Affiliated Company.

8.18 Election for Fully Vested Employees Transferred to Fisher-Price, Inc.

A fully vested Participant who prior to April 1, 1997 transfers employment from the Company (or other Participating Company) to Fisher-Price, Inc. and who is eligible to participate in the Fisher-Price, Inc. Matching Savings Plan may elect to transfer his entire vested account balance in the Plan to the Fisher-Price, Inc. Matching Savings Plan by filing an election form at the time and in the manner prescribed by the Committee. The transfer must be made in cash except that any promissory note evidencing an outstanding loan to the Participant from the Plan

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may be transferred in kind. Any transferred promissory note shall thereafter be repayable by the Participant to the Fisher-Price, Inc. Matching Savings Plan in accordance with its terms.

8.19 Provision for Small Benefits.

Notwithstanding anything in this Article to the contrary, a Participant who terminates employment with the Company and all Affiliated Companies shall receive a distribution of his Distributable Benefit in a single lump sum payment no later than sixty (60) days after the close of the Plan Year in which the Participant’s termination of employment occurs to the extent administratively feasible, provided that the value of such Distributable Benefit (including that portion of the Participant’s Distributable Benefit that is attributable to the Participant’s Transfer/Rollover Account) is equal to or less than $1,000, or for distributions made before March 28, 2005, the value of such Distributable Benefit (excluding that portion of the Participant’s Distributable Benefit that is attributable to the Participant’s Transfer/Rollover Account) is equal to or less than $5,000, determined as of the Valuation Date coincident with or immediately preceding his termination of employment. Such distribution shall be made directly to the Participant after withholding applicable income taxes unless the Participant elects a direct rollover to an “eligible retirement plan” as provided in Section 8.8.

8.20 Special Provisions Applicable to Tyco Plan Accounts.

The provisions of this Section 8.20 shall apply to the balance of a Participant’s Tyco Before-Tax Contributions Account and Tyco Company Matching Account (“Tyco Accounts”).

(a) While he is still an Eligible Employee, a Participant may withdraw amounts from his Tyco Before-Tax Contributions Account to the extent that the Participant would be permitted to make a withdrawal from his Before-Tax Contributions Account in accordance with Section 8.6 and a Participant may withdraw amounts from his Tyco Company Matching Account to the extent that the Participant would be permitted to make a withdrawal from his Company Matching Account in accordance with Section 8.6. For this purpose, a Participant shall be deemed to have incurred a Total and Permanent Disability if because of a physical or mental disability, he will be unable to perform the duties of his customary position of employment (or is unable to engage in any substantial activity) for an indefinite period which the Committee considers will be of long continued duration.

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(b) A Participant may, in addition to the other forms of payment available under Section 8.7, elect to receive distribution of any amount payable from the Participant’s Tyco Accounts or Transfer/Rollover Account paid in the form of either monthly, quarterly or annual installments over a fixed period of time not to exceed the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant’s Beneficiary. A Beneficiary of a deceased Participant may, in addition to the other forms of payment available under Section 8.3 or 8.4, elect to receive distribution of any amount payable from the Participant’s Tyco Accounts or Transfer/Rollover Account paid in the form of either monthly, quarterly or annual installments over a fixed reasonable period of time not to exceed the life expectancy of the Beneficiary. Any distribution made under this Section 8.20(b) shall be subject to the limitations of Section 401 (a)(9) of the Code.

8.21 Special Provisions Applicable to PrintPaks Plan Accounts.

The provisions of this Section 8.21 shall apply to the balance of a Participant’s PrintPaks Before-Tax Contributions Account and PrintPaks Company Matching Account (“PrintPaks Accounts”).

(a) While he is still an Eligible Employee, a Participant may withdraw amounts from his PrintPaks Before-Tax Contributions Account to the extent that the Participant would be permitted to make a withdrawal from his Before-Tax Contributions Account in accordance with Section 8.6 and a Participant may withdraw amounts from his PrintPaks Company Matching Account to the extent that the Participant would be permitted to make a withdrawal from his Company Matching Account in accordance with Section 8.6. A Participant who has reached age 55 shall also be eligible to withdraw amounts from his PrintPaks Company Matching Account while he is an Eligible Employee to the extent otherwise permitted by Section 8.6.

(b) A Participant may, in addition to the other forms of payment available under Section 8.7, elect to receive distribution of any amount payable from the Participant’s PrintPaks Accounts or Transfer/Rollover Account paid in the form of either monthly, quarterly or annual installments over a fixed reasonable period of time not to exceed the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant’s Beneficiary. A Beneficiary of a deceased

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Participant may, in addition to the other forms of payment available under Section 8.3 or 8.4, elect to receive distribution of any amount payable from the Participant’s PrintPaks Account or Transfer/Rollover Account paid in the form of either monthly, quarterly or annual installments over a fixed reasonable period of time not to exceed the life expectancy of the Beneficiary. Any distribution made under this Section 8.21(b) shall be subject to the limitations of Section 401(a)(9) of the Code.

8.22 Special Provisions Applicable to Fort Wayne Plan Accounts.

With respect to the balance of a Participant’s Fort Wayne Plan Before-Tax Contributions Account, Fort Wayne Plan Company Matching Account and Fort Wayne Plan Nonelective Account (“Fort Wayne Plan Accounts”), while the Participant is still an Eligible Employee, a Participant may withdraw amounts from his Fort Wayne Plan Before-Tax Contributions Account to the extent that the Participant would be permitted to make a withdrawal from his Before-Tax Contributions Account in accordance with Section 8.6 and a Participant may withdraw amounts from his Fort Wayne Plan Company Matching Account to the extent that the Participant would be permitted to make a withdrawal from his Company Matching Account in accordance with Section 8.6.

8.23 Special Provisions Applicable to Pleasant Plan Nonelective Account.

With respect to the balance of a Participant’s Pleasant Plan Nonelective Account, while the Participant is still an Eligible Employee, a Participant may withdraw amounts from his Pleasant Plan Nonelective Account to the extent that the Participant would be permitted to make a withdrawal from his Company Matching Account in accordance with Section 8.6.

ARTICLE IX

OPERATION AND ADMINISTRATION OF THE PLAN

9.1 Plan Administration.

(a) Authority to control and manage the operation and administration of the Plan shall be vested in a committee (“Committee”) as provided in this Article IX.

(b) The members of the Committee shall be appointed by the Governance Committee and shall hold office until resignation, death or removal by the Governance Committee.

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(c) For purposes of ERISA Section 402(a), the members of the Committee shall be named fiduciaries of this Plan.

(d) The Secretary of the Committee shall cause to be attached to the copy of the Plan maintained in the office of the Committee for the purpose of inspection an accurate schedule listing the names of all persons from time to time serving as the members of the Committee.

(e) Notwithstanding the foregoing, a Trustee with whom Plan assets have been placed in trust or an Investment Manager appointed pursuant to Section 9.3 may be granted exclusive authority and discretion to manage and control all or any portion of the assets of the Plan.

9.2 Committee Powers.

The Committee shall have all powers and discretion necessary to provide overall guidance with respect to the maintenance and administration of the Plan and control its operations. In addition to any powers and authority conferred on the Committee elsewhere in the Plan or by law, the Committee shall have, by way of illustration but not by way of limitation, the following powers and authority:

(a) To allocate fiduciary responsibilities (other than trustee responsibilities) among the Committee members and to designate one or more other persons to carry out fiduciary responsibilities (other than trustee responsibilities). However, no allocation or delegation under this Section 9.2(a) shall be effective until the person or persons to whom the responsibilities have been allocated or delegated agree to assume the responsibilities. The term “trustee responsibilities” as used herein shall have the meaning set forth in Section 405(c) of ERISA. The preceding provisions of this Section 9.2(a) shall not limit the authority of the Committee to appoint one or more Investment Managers in accordance with Section 9.3.

(b) To designate agents to carry out responsibilities relating to the Plan, other than fiduciary responsibilities.

(c) To employ such legal, actuarial, medical, accounting, clerical and other assistance as it may deem appropriate in carrying out the provisions of this Plan, including one or more persons to render advice with regard to any responsibility any members of the Committee or any other fiduciary may have under the Plan.

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(d) To review and approve the appointment and removal of Trustees, Custodians and Investment Managers for the Plan.

(e) To establish rules and regulations from time to time for the conduct of the Committee’s business and the administration and effectuation of this Plan.

(f) To administer, interpret, construe and apply this Plan in its discretion and to decide all questions which may arise or which may be raised under this Plan by any Employee, Participant, former Participant, Beneficiary or other person whatsoever, including but not limited to all questions relating to eligibility to participate in the Plan, the amount of service of any Participant, and the amount of benefits to which any Participant or his Beneficiary may be entitled by reason of his service prior to or after the Effective Date hereof.

(g) To determine the manner in which the assets of this Plan, or any part thereof, shall be disbursed.

(h) To direct the Trustee, in writing, from time to time, to invest and reinvest the Trust Fund, or any part thereof, or to purchase, exchange, or lease any property, real or personal, which the Committee may designate. This shall include the right to direct the investment of all or any part of the Trust in any one security or any one type of securities permitted hereunder. Among the securities which the Committee may direct the Trustee to purchase are “employer securities” as defined in Code Section 409(1) or any successor statute thereto.

(i) To take such action as is necessary to have the Plan comply with Section 414(u) of the Code (regarding the reemployment of military veterans), and in such regard, and notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided no less favorably than is required by Section 414(u) of the Code.

(j) To adopt and implement such rules regarding a Participant’s ability to direct the investment, reinvestment and transfer of his Account among the investment alternatives available under the Plan, including but not limited to restricting the frequency or timing of trades in or out of one or more investment alternatives by a Participant, to the extent the Committee deems necessary or appropriate to limit or prevent harm to other Participant Accounts, to comply with the policies and procedures of the investment

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alternatives, to ensure that the Plan and Participant transactions thereunder are administered in compliance with applicable laws (including insider trading, market timing and related rules) or to otherwise provide for the efficient and effective administration of the Plan.

(k) To establish rules and procedures relating to Participant elections under the Plan, including Compensation reduction elections under Article V, distributions elections under Article VIII and investment elections under Article IV, and the Committee in its discretion may employ one or more persons or entities to provide advice or other assistance to Participants in making their said investment elections.

(l) To ensure that contributions (and the allocations thereof) do not exceed the limitations thereon set forth in the Plan.

(m) To authorize all disbursements by the Trustee except for the ordinary expenses of administration of the Trust.

(n) To take such action as it deems necessary and administratively feasible, including the prosecution of lawsuits, to collect from any Participant, Beneficiary or other person or entity (including without limitation the estate or heirs of a deceased Participant) any erroneous benefit payments or other amounts paid by the Plan in excess of the benefits provided for in the Plan.

(o) With respect to any Participant who is or may become subject to the reporting and short-swing profit recovery provisions of Section 16 of the Securities Exchange Act of 1934, to take any action necessary or appropriate to ensure that any transaction with respect to the portion of the Participant’s Accounts invested in Common Stock complies with all applicable conditions of Rule 16b-3 promulgated under Section 16 (or its successor), including modifying or limiting the Participant’s elections under the Plan that directly or indirectly affect Account investments or other transactions in Common Stock.

(p) To modify or supplement any Plan accounting method, practice or procedure, make any adjustments to Accounts, authorize special contributions, or modify or supplement any other aspect of the operation or administration of the Plan in such manner and to such extent consistent with and permitted by the Act and the Code that the Committee deems necessary or appropriate to correct errors and mistakes, to effect

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proper and equitable Account adjustments or otherwise to ensure the proper and appropriate administration and operations of the Plan.

Any action taken in good faith by the Committee in the exercise of authority conferred upon it by this Plan shall be conclusive and binding upon the Participants and their Beneficiaries. All discretionary powers conferred upon the Committee shall be absolute.

9.3 Investment Manager.

(a) The Committee, by action reflected in the minutes thereof, may appoint one or more Investment Managers, as defined in Section 3(38) of ERISA, to manage all or a portion of the assets of the Plan.

(b) An Investment Manager shall discharge its duties in accordance with applicable law and in particular in accordance with Section 404(a)(1) of ERISA.

(c) An Investment Manager, when appointed, shall have full power to manage the assets of the Plan for which it has responsibility, and neither the Company nor the Committee shall thereafter have any responsibility for the management of those assets.

(d) The Committee shall monitor the performance of any Investment Manager.

9.4 Periodic Review.

(a) If deemed appropriate by the Committee, the Committee shall adopt an investment policy statement for the investment and reinvestment of the assets of the Plan.

(b) All actions taken by the Committee with respect to the investment policy of the Plan, including the reasons therefor, shall be fully reflected in the minutes of the Committee.

9.5 Committee Procedure.

(a) A majority of the members of the Committee as constituted at any time shall constitute a quorum, and any action by a majority of the members present at any meeting, or authorized by a majority of the members in writing without a meeting, shall constitute the action of the Committee.

(b) The Committee may designate certain of its members as authorized to execute any document or documents on behalf of the Committee, in which event the Committee shall notify the Trustee of this action and the name or names of the designated

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members. The Trustee, Company, Participants, Beneficiaries, and any other party dealing with the Committee may accept and rely upon any document executed by the designated members as representing action by the Committee until the Committee shall file with the Trustee a written revocation of the authorization of the designated members.

9.6 Compensation of Committee.

(a) Members of the Committee shall serve without compensation unless the Board of Directors shall otherwise determine. However, in no event shall any member of the Committee who is an Employee receive compensation from the Plan for his services as a member of the Committee.

(b) All members shall be reimbursed for any necessary or appropriate expenditures incurred in the discharge of duties as members of the Committee.

(c) The compensation or fees, as the case may be, of all officers, agents, counsel, the Trustee, or other persons retained or employed by the Committee shall be fixed by the Committee.

9.7 Resignation and Removal of Members.

Any member of the Committee may resign at any time by giving written notice to the other members and to the Governance Committee effective as therein stated. Any member of the Committee may, at any time, be removed by the Governance Committee.

9.8 Appointment of Successors.

(a) Upon the death, resignation, or removal of any Committee member, the Governance Committee may appoint a successor.

(b) Notice of appointment of a successor member shall be given in writing to the Trustee and to the members of the Committee.

(c) Upon termination, for any reason, of a Committee member’s status as a member of the Committee, the member’s status as a Named Fiduciary shall concurrently be terminated, and upon the appointment of a successor Committee member the successor shall assume the status of a Named Fiduciary as provided in Section 9.1.

9.9 Records.

(a) The Committee shall keep a record of all its proceedings and shall keep, or cause to be kept, all such books, accounts, records, or other data as may be necessary or

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advisable in its judgment for the administration of the Plan and to properly reflect the affairs thereof.

(b) However, nothing in this Section 9.9 shall require the Committee or any member thereof to perform any act which, pursuant to law or the provisions of this Plan, is the responsibility of the Plan Administrator, nor shall this Section relieve the Plan Administrator from such responsibility.

9.10 Reliance Upon Documents and Opinions.

(a) The members of the Committee, the Board of Directors, the Governance Committee, the Company and any person delegated under the provisions hereof to carry out any fiduciary responsibilities under the Plan (“delegated fiduciary”), shall be entitled to rely upon any tables, valuations, computations, estimates, certificates and reports furnished by any consultant, or firm or corporation which employs one or more consultants, upon any opinions furnished by legal counsel, and upon any reports furnished by the Trustee. The members of the Committee, the Board of Directors, the Governance Committee, the Company and any delegated fiduciary shall be fully protected and shall not be liable in any manner whatsoever for anything done or action taken or suffered in reliance upon any such consultant or firm or corporation which employs one or more consultants, Trustee, or counsel.

(b) Any and all such things done or actions taken or suffered by the Committee, the Board of Directors, the Governance Committee, the Company and any delegated fiduciary shall be conclusive and binding on all Employees, Participants, Beneficiaries, and any other persons whomsoever, except as otherwise provided by law.

(c) The Committee and any delegated fiduciary may, but are not required to, rely upon all records of the Company with respect to any matter or thing whatsoever, and may likewise treat those records as conclusive with respect to all Employees, Participants, Beneficiaries, and any other persons whomsoever, except as otherwise provided by law.

9.11 Requirement of Proof.

The Committee or the Company may require satisfactory proof of any matter under this Plan from or with respect to any Employee, Participant, or Beneficiary, and no person shall

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acquire any rights or be entitled to receive any benefits under this Plan until the required proof shall be furnished.

9.12 Reliance on Committee Memorandum.

Any person dealing with the Committee may rely on and shall be fully protected in relying on a certificate or memorandum in writing signed by any Committee member or other person so authorized, or by the majority of the members of the Committee, as constituted as of the date of the certificate or memorandum, as evidence of any action taken or resolution adopted by the Committee.

9.13 Multiple Fiduciary Capacity.

Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan.

9.14 Limitation on Liability.

(a) Except as provided in Part 4 of Title I of ERISA, no person shall be subject to any liability with respect to his duties under the Plan unless he acts fraudulently or in bad faith.

(b) No person shall be liable for any breach of fiduciary responsibility resulting from the act or omission of any other fiduciary or any person to whom fiduciary responsibilities have been allocated or delegated, except as provided in Part 4 of Title I of ERISA.

(c) No action or responsibility shall be deemed to be a fiduciary action or responsibility except to the extent required by ERISA.

9.15 Indemnification.

(a) To the extent permitted by law, the Company shall indemnify each member of the Board of Directors, the Governance Committee and the Committee, and any other Employee of the Company with duties under the Plan, against expenses (including any amount paid in settlement) reasonably incurred by him in connection with any claims against him by reason of his conduct in the performance of his duties under the Plan, except in relation to matters as to which he acted fraudulently or in bad faith in the performance of such duties. The preceding right of indemnification shall pass to the estate of such a person.

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(b) The preceding right of indemnification shall be in addition to any other right to which the Board member or Committee member or other person may be entitled as a matter of law or otherwise.

9.16 Allocation of Fiduciary Responsibility.

(a) Part 4 of Title I of ERISA permits the division, allocation and delegation between Plan fiduciaries of the fiduciary responsibilities owed to the Plan Participants. Under this concept, each fiduciary, including a Named Fiduciary, is accountable only for his own functions, except to the extent of his co-fiduciary liability under Section 405 of ERISA.

(b) Under the preceding provisions of this Article IX, the day-to-day operational, administrative and investment aspects of the Plan have been delegated to the Committee. Except to the extent expressly provided to the contrary in the Plan document, the responsibilities delegated to the Committee include, by way of illustration but not by way of limitation, such matters as:

(i) Satisfying accounting and auditing requirements;

(ii) Satisfying insurance and bonding requirements;

(iii) Administering the Plan’s claims and procedure; and

(iv) Appointing Investment Managers.

9.17 Bonding.

(a) Except as is prescribed by the Board of Directors, as provided in Section 412 of ERISA, or as may be required under any other applicable law, no bond or other security shall be required by any member of the Committee, or any other fiduciary under this Plan.

(b) Notwithstanding the foregoing, for purposes of satisfying its indemnity obligations under Section 9.15, the Company may (but need not) purchase and pay premiums for one or more policies of insurance. However, this insurance shall not release the Company of its liability under the indemnification provisions.

9.18 Prohibition Against Certain Actions.

(a) To the extent prohibited by law, in administering this Plan the Committee shall not discriminate in favor of any class of Employees and particularly it shall not

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discriminate in favor of highly compensated Employees, or Employees who are officers or shareholders of the Company.

(b) The Committee shall not cause the Plan to engage in any transaction that constitutes a nonexempt prohibited transaction under Section 4975(c) of the Code or Section 406(a) of ERISA.

(c) All individuals who are fiduciaries with respect to the Plan (as defined in Section 3(21) of ERISA) shall discharge their fiduciary duties in accordance with applicable law, and in particular, in accordance with the standards of conduct contained in Section 404 of ERISA.

9.19 Plan Expenses.

(a) All expenses incurred in the establishment, administration and operation of the Plan, including but not limited to the expenses incurred by the members of the Committee in exercising their duties, shall be charged to the Trust Fund and allocated to Participants Accounts as determined by the Committee, but shall be paid by the Company if not paid by the Trust Fund.

(b) Notwithstanding the foregoing, the cost of interest and normal brokerage charges which are included in the cost of securities purchased by the Trust Fund (or charged to proceeds in the case of sales) or other charges relating to specific assets of the Plan shall be charged and allocated in a fair and equitable manner to the Accounts to which the securities (or other assets) are allocated.

ARTICLE X

SPECIAL PROVISIONS

CONCERNING COMPANY STOCK

EFFECTIVE AS OF OCTOBER 1, 1992

10.1 Securities Transactions.

Subject to the limitations of Section 6.6(a)(iv), the Trustee shall acquire Company Stock in the open market or from the Company or any other person, including a party in interest, pursuant to a Participant’s election to invest any Company contributions on his behalf (including Before-Tax Contributions), or Participant After-Tax Contributions, in the Company Stock alternative established by the Committee in accordance with Section 6.6, or to transfer amounts held in other investment alternatives to such Company Stock alternative. No commission will be

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paid in connection with the Trustee’s acquisition of Company Stock from a party in interest. Pending acquisition of Company Stock and pursuant to a Participant’s investment election, elected amounts shall be allocated to the Participant’s Company Stock subaccount in cash and may be invested in any short-term interest fund of the Trustee. Neither the Company, nor the Committee, nor any Trustee have any responsibility or duty to time any transaction involving Company Stock in order to anticipate market conditions or changes in Company Stock value. Neither the Company, nor the Committee nor any Trustee have any responsibility or duty to sell Company Stock held in the Trust Fund in order to maximize return or minimize loss.

10.2 Valuation of Company Securities.

When it is necessary to value Company Stock held by the Plan, the value will be the current fair market value of the Company Stock, determined in accordance with applicable legal requirements.

If the Company Stock is publicly traded, fair market value will be based on the most recent closing price in public trading, as reported in The Wall Street Journal or any other publication of general circulation designated by the Committee, unless another method of valuation is required by the standards applicable to prudent fiduciaries.

If the Company Stock cannot be valued on the basis of its closing price in recent public trading, fair market value will be determined by the Company in good faith based on all relevant factors for determining the fair market value of securities. Relevant factors include an independent appraisal by a person who customarily makes such appraisals, if an appraisal of the fair market value of the Company Stock as of the relevant date was obtained.

In the case of a transaction between the Plan and a party in interest, the fair market value of the Company Stock must be determined as of the date of the transaction rather than as of some other Valuation Date occurring before or after the transaction. In other cases, the fair market value of the Company Stock will be determined as of the most recent Valuation Date.

10.3 Allocation of Stock Dividends and Splits.

Company Stock received by the Trust as a result of a Company Stock split or Company Stock dividend on Company Stock held in Participants’ Accounts will be allocated as of the Valuation Date coincident with or following the date of such split or dividend, to each Participant who has such an Account. The amount allocated will bear substantially the same proportion to the total number of shares received as the number of shares in the Participant’s

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Account bears to the total number of shares allocated to such Accounts of all Participants immediately before the allocation. The shares will be allocated to the nearest thousandth of a share.

10.4 Reinvestment of Dividends.

Upon direction of the Committee, cash dividends may be reinvested as soon as practicable by the Trustee in shares of Company Stock for Participants’ Accounts. Cash dividends may be reinvested in Company Stock purchased as provided in Section 10.1 or purchased from the Accounts of Participants who receive cash distributions of a fractional share or a fractional interest therein.

10.5 Voting of Company Stock.

The Trustee shall have no discretion or authority to vote Company Stock held in the Trust on any matter presented for a vote by the stockholders of the Company except in accordance with timely directions received by the Trustee from Participants, unless otherwise required by applicable law.

(a) Each Participant shall be entitled to direct the Trustee as to the voting of all Company Stock allocated and credited to his Account.

(b) All Participants entitled to direct such voting shall be notified by the Company, pursuant to its normal communications with shareholders, of each occasion for the exercise of such voting rights within a reasonable time before such rights are to be exercised. Such notification shall include all information distributed to shareholders either by the Company or any other party regarding the exercise of such rights. If a Participant shall fail to direct the Trustee as to the exercise of voting rights arising under any Company Stock credited to his Accounts, or if any Company Stock held in the Plan has not been allocated to Participants’ Accounts, the Trustee shall not be required to vote such Company Stock except as otherwise required by applicable law. The Trustee shall maintain confidentiality with respect to the voting directions of all Participants.

(c) Each Participant shall be a Named Fiduciary (as that term is defined in ERISA Section 402(a)(2)) with respect to Company Stock for which he has the right to direct the voting under the Plan but solely for the purpose of exercising voting rights pursuant to this Section 10.5.

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10.6 Confidentiality Procedures.

The Committee shall establish procedures intended to ensure the confidentiality of information relating to Participant transactions involving Company Stock, including the exercise of voting, tender and similar rights. The Committee shall also be responsible for ensuring the adequacy of the confidentiality procedures and monitoring compliance with such procedures. The Committee may, in its sole discretion, appoint an independent fiduciary to carry out any activities that it determines involve a potential for undue Company influence on Participants with respect to the exercise of their rights as shareholders.

10.7 Securities Law Limitation.

Neither the Committee nor the Trustee shall be required to engage in any transaction, including, without limitation, directing the purchase or sale of Company Stock, which it determines in its sole discretion might tend to subject itself, its members, the Plan, the Company, or any Participant or Beneficiary to a liability under federal or state securities laws.

ARTICLE XI

MERGER OF COMPANY; MERGER OF PLAN

11.1 Effect of Reorganization or Transfer of Assets.

In the event of a consolidation, merger, sale, liquidation, or other transfer of the operating assets of the Company to any other company, the ultimate successor or successors to the business of the Company shall automatically be deemed to have elected to continue this Plan in full force and effect, in the same manner as if the Plan had been adopted by resolution of its board of directors, unless the successor(s), by resolution of its board of directors, shall elect not to so continue this Plan in effect, in which case the Plan shall automatically be deemed terminated as of the applicable effective date set forth in the board resolution.

11.2 Merger Restriction.

Notwithstanding any other provision in this Article, this Plan shall not in whole or in part merge or consolidate with, or transfer its assets or liabilities to any other plan unless each affected Participant in this Plan would receive a benefit immediately after the merger, consolidation, or transfer (if the Plan then terminated) which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated).

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ARTICLE XII

PLAN TERMINATION AND

DISCONTINUANCE OF CONTRIBUTIONS

12.1 Plan Termination.

(a)   (i) Subject to the following provisions of this Section 12.1, the Company may terminate the Plan and the Trust Agreements at any time, following authorization from the Board of Directors or any committee delegated such authority by the Board, by an instrument in writing executed in the name of the Company by an officer or officers duly authorized to execute such an instrument, and delivered to the Trustee.

(ii) The Plan and Trust Agreements may terminate if the Company merges into any other corporation, if as the result of the merger the entity of the Company ceases, and the Plan is terminated pursuant to the rules of Section 11.1.

(b) Upon and after the effective date of the termination, the Company shall not make any further contributions under the Plan and no contributions need be made by the Company applicable to the Plan year in which the termination occurs, except as may otherwise be required by law.

(c) The rights of all affected Participants to benefits accrued to the date of termination of the Plan, to the extent funded as of the date of termination, shall automatically become vested as of that date.

12.2 Discontinuance of Contributions.

(a) In the event the Company decides it is impossible or inadvisable for business reasons to continue to make contributions under the Plan, the Company by resolution of the Board of Directors or any committee delegated such authority by the Board of Directors, may discontinue contributions to the Plan. Upon and after the effective date of this discontinuance, no Participating Company or Participant shall make any further contributions under the Plan and no contributions need to be made by a Participating Company with respect to the Plan Year in which the discontinuance occurs, except as may otherwise be required by law. A Participant shall be released from any salary reduction agreement under the Plan as of the effective date of a discontinuance of contributions.

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(b) The discontinuance of contributions on the part of the Company shall not terminate the Plan as to the funds and assets then held by the Trustee, or operate to accelerate any payments of distributions to or for the benefit of Participants or Beneficiaries, and the Trustee shall continue to administer the Trust Fund in accordance with the provisions of the Plan until all of the obligations under the Plan shall have been discharged and satisfied.

(c) However, if this discontinuance of contributions shall cause the Plan to lose its status as a qualified plan under Code Section 401(a), the Plan shall be terminated in accordance with the provisions of this Article XII.

(d) On and after the effective date of a discontinuance of contributions, the rights of all affected Participants to benefits accrued to that date, to the extent funded as of that date, shall automatically become fully vested as of that date.

12.3 Rights of Participants.

In the event of the termination of the Plan, for any cause whatsoever, all assets of the Plan, after payment of expenses, shall be used for the exclusive benefit of Participants and their Beneficiaries and no part thereof shall be returned to the Company, except as provided in Section 6.7 of this Plan.

12.4 Trustee’s Duties on Termination.

(a) On or before the effective date of termination of this Plan, the Trustee shall proceed as soon as possible, but in any event within six months from the effective date, to reduce all of the assets of the Trust Fund to cash and other securities in such proportions as the Committee shall determine (after approval by the Internal Revenue Service, if necessary or desirable, with respect to any portion of the assets of the Trust Fund held in common stock or securities of the Company).

(b) After first deducting the estimated expenses for liquidation and distribution chargeable to the Trust Fund, and after setting aside a reasonable reserve for expenses and liabilities (absolute or contingent) of the Trust, the Committee shall make required allocations of items of income and expense to the Accounts.

(c) Following these allocations, the Trustee shall promptly, after receipt of appropriate instructions from the Committee, distribute in accordance with Section 8.7 to

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each former Participant in Company Stock or cash an amount equal to the amount credited to his Accounts as of the date of completion of the liquidation.

(d) The Trustee and the Committee shall continue to function as such for such period of time as may be necessary for the winding up of this Plan and for the making of distributions in accordance with the provisions of this Plan.

(e) Notwithstanding the foregoing, distributions to Participants upon Plan termination in accordance with this Section 12.4 shall only be made if a “successor plan,” within the meaning of regulations under Code Section 401(k)(10), is not established. In the event a “successor plan” is established prior to or subsequent to the termination of the Plan, the Committee shall direct the Trustee to continue to hold any assets of the Trust Fund not payable upon the termination until such assets may, at the direction of the Committee, be transferred to and held in the successor plan until distributable under the terms of that successor plan.

12.5 Partial Termination.

(a) In the event of a partial termination of the Plan within the meaning of Code Section 411(d)(3), the interests of affected Participants in the Trust Fund, as of the date of the partial termination, shall become nonforfeitable as of that date.

(b) That portion of the assets of the Plan affected by the partial termination shall be used exclusively for the benefit of the affected Participants and their Beneficiaries, and no part thereof shall otherwise be applied.

(c) With respect to Plan assets and Participants affected by a partial termination, the Committee and the Trustee shall follow the same procedures and take the same actions prescribed in this Article XII in the case of a total termination of the Plan.

12.6 Failure to Contribute.

The failure of a Participating Company to contribute to the Trust in any year, if contributions are not required under the Plan for that year, shall not constitute a complete discontinuance of contributions to the Plan.

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ARTICLE XIII

APPLICATION FOR BENEFITS

13.1 Application for Benefits.

The Committee may require any person claiming benefits under the Plan to submit an application therefor, together with such documents and information as the Committee may require. In the case of any person suffering from a disability which prevents the claimant from making personal application for benefits, the Committee may, in its discretion, permit another person acting on his behalf to submit the application.

13.2 Action on Application.

(a) Within ninety days following receipt of an application and all necessary documents and information, the Committee’s authorized delegate reviewing the claim shall furnish the claimant with written notice of the decision rendered with respect to the application.

(b) In the case of a denial of the claimant’s application, the written notice shall set forth:

(i) The specific reasons for the denial, with reference to the Plan provisions upon which the denial is based;

(ii) A description of any additional information or material necessary for perfection of the application (together with an explanation why the material or information is necessary); and

(iii) An explanation of the Plan’s claim review procedure and the claimants right to bring civil action under federal law following a denial on appeal.

(c) A claimant who wishes to contest the denial of his application for benefits or to contest the amount of benefits payable to him shall follow the procedures for an appeal of benefits as set forth in Section 13.3 below, and shall exhaust such administrative procedures prior to seeking any other form of relief.

13.3 Appeals.

(a)    (i) A claimant who does not agree with the decision rendered with respect to his application may appeal the decision to the Committee.

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(ii) The appeal shall be made, in writing, within sixty days after the date of notice of the decision with respect to the application.

(iii) If the application has neither been approved nor denied within the ninety day period provided in Section 13.2 above, then the appeal shall be made within sixty days after the expiration of the ninety day period.

(b) The claimant may request that his application be given full and fair review by the Committee. The claimant may review all pertinent documents and submit issues and comments in writing in connection with the appeal.

(c) The decision of the Committee shall be made promptly, and not later than sixty days after the Committee’s receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty days after receipt of a request for review.

(d) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant with specific reference to the pertinent Plan provisions upon which the decision is based and shall include a statement that the claimant is entitled to receive upon request and free of charge, reasonable access to, or copies of, all documents, records or other information relevant to the Committee’s decision and a statement of the claimant’s right to bring civil action.

ARTICLE XIV

LIMITATIONS ON CONTRIBUTIONS

14.1 General Rule.

(a) Except to the extent permitted under Section 5.2(d) of the Plan and Section 414(v) of the Code, the total Annual Additions under this Plan to a Participant’s Plan Accounts shall not exceed the lesser of:

(i) Forty Thousand Dollars ($40,000) (as adjusted for increases in the cost-of-living under Section 415(d) of the Code), or

(ii) one hundred percent (100%) of the Participant’s total Compensation from the Company and any Affiliated Companies for the

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year, excluding amounts otherwise treated as Annual Additions under Section 14.2.

The limitation in Section 14.1(a)(ii) shall not apply to any contribution for medical benefits after separation from Service (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition.

(b) For purposes of this Article XIV, the Company has elected a “Limitation Year” corresponding to the Plan Year.

14.2 Annual Additions.

For purposes of Section 14.1, the term “Annual Additions” shall mean, for any Limitation Year, the sum of:

(a) the amount credited to the Participant’s Accounts from Company contributions for such Limitation Year;

(b) any Employee contributions for the Limitation Year; and

(c) any amounts described in Section 415(1)(1) or 419(A)(d)(2) of the Code.

14.3 Other Defined Contribution Plans.

If the Company or an Affiliated Company is contributing to any other defined contribution plan (as defined in Section 415(k) of the Code) for its Employees, some or all of whom may be Participants in this Plan, then contributions to the other plan shall be aggregated with contributions under this Plan for the purposes of applying the limitations of Section 14.1.

14.4 Adjustments for Excess Annual Additions.

In general, the amount of excess for any Limitation Year under this Plan and any other defined contribution plan (as defined in Code Section 414(i)) or defined benefit plan (as defined in Code Section 414(j)) maintained by the Company or an Affiliated Company will be determined so as to avoid Annual Additions in excess of the limitations set forth in Sections 14.1 through 14.3. However, if as a result of an administrative error, the Annual Additions to a Participant’s Accounts under this Plan (after giving effect to the maximum permissible adjustments under the other plans) would exceed the applicable limitations described in Sections 14.1 through 14.3, the excess amount shall be subject to this Section 14.4.

(a) If the Participant made any after-tax contributions to this or any other defined contribution plan that is maintained by the Company or an Affiliated Company,

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which after-tax contributions were not matched by matching contributions, within the meaning of Code Section 401(m), such after-tax contributions and any earnings thereon shall be returned to the Participant to the extent of any excess Annual Additions.

(b) If excess Annual Additions remain after the application of the above rule, if the Participant made any Before-Tax Contributions for the Plan Year to this or any other defined contribution plan that is maintained by the Company or an Affiliated Company, which Before-Tax Contributions were not matched by matching contributions, within the meaning of Code Section 401(m), Before-Tax Contributions and any earnings thereon shall be returned to the Participant to the extent of any excess Annual Additions.

(c) If excess Annual Additions remain after the application of the above rule, if the Participant made any after-tax contributions for the Plan Year to this or any other defined contribution plan that is maintained by the Company or an Affiliated Company, which after-tax contributions were matched by matching contributions, within the meaning of Code Section 401(m), any such after-tax contributions and any earnings thereon shall be returned to the Participant and any matching contributions attributable thereto shall be reduced to the extent necessary to eliminate any remaining excess Annual Additions.

(d) If excess Annual Additions remain after the application of the above rule, if the Participant made any Before-Tax Contributions for the Plan Year to this or any other defined contribution plan that is maintained by the Company or an Affiliated Company, which Before-Tax Contributions were matched by matching contributions, within the meaning of Code Section 401(m), any such Before-Tax Contributions and any earnings thereon shall be returned to the Participant and any matching contributions attributable thereto shall be reduced to the extent necessary to eliminate any remaining excess Annual Additions.

(e) If excess Annual Additions remain after the application of the above rule, any other Company contributions for the Plan Year shall be reduced to the extent necessary to eliminate any remaining excess Annual Additions.

14.5 Disposition of Excess Amounts.

Any excess amounts contributed by a Participating Company on behalf of a Participant for any Plan Year (other than Before-Tax Contributions) shall be held unallocated in a suspense

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account for the Plan Year and applied, to the extent possible, first to reduce the Participating Company contributions for the Plan Year, and next, to reduce the Participating Company contributions for the succeeding Plan Year, or Years, if necessary. No investment gains or losses shall be allocated to a suspense account.

14.6 Affiliated Company.

For purposes of this Article XIV, the status of an entity as an Affiliated Company shall be determined by reference to the percentage tests set forth in Code Section 415(h).

ARTICLE XV

RESTRICTION ON ALIENATION

15.1 General Restrictions Against Alienation.

(a) The interest of any Participant or Beneficiary in the income, benefits, payments, claims or rights hereunder, or in the Trust Fund shall not in any event be subject to sale, assignment, hypothecation, or transfer. Each Participant and Beneficiary is prohibited from anticipating, encumbering, assigning, or in any manner alienating his or her interest under the Trust Fund, and is without power to do so, except as may otherwise be provided for in the Trust Agreement. The interest of any Participant or Beneficiary shall not be liable or subject to his debts, liabilities or obligations, now contracted, or which may be subsequently contracted. The interest of any Participant or Beneficiary shall be free from all claims, liabilities, bankruptcy proceedings, or other legal process now or hereafter incurred or arising; and the interest or any part thereof, shall not be subject to any judgment rendered against the Participant or Beneficiary.

(b) In the event any person attempts to take any action contrary to this Article XV, that action shall not be effective, and all Participants and their Beneficiaries, may disregard that action and shall not suffer any liability for any disregard of that action, and shall be reimbursed on demand out of the Trust Fund for the amount of any loss, cost or expense incurred as a result of disregarding or of acting in disregard of that action.

(c) The preceding provisions of this Section 15.1 shall be interpreted and applied by the Committee in accordance with the requirements of Code Section 401(a)(13) as construed and interpreted by authoritative judicial and administrative rulings and regulations.

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(d) The provisions of Subsections 15.1(a) and 15.1(b) are expressly subject to qualified domestic relations orders, as provided in Code Section 401(a)(13)(B).

15.2 Nonconforming Distributions Under Court Order.

(a) In the event that a court with jurisdiction over the Plan and the Trust Fund shall issue an order or render a judgment requiring that all or part of a Participant’s interest under the Plan and in the Trust Fund be paid to a spouse, former spouse and/or children of the Participant by reason of or in connection with the marital dissolution and/or marital separation of the Participant and the spouse, and/or some other similar proceeding involving marital rights and property interests, then notwithstanding the provisions of Section 15.1 the Committee may, in its absolute discretion, direct the applicable Trustee to comply with that court order or judgment and distribute assets of the Trust Fund in accordance therewith. Pending distribution to an alternate payee of any portion of a Participant’s vested interest in the Trust Fund, pursuant to a court order or judgment, such portion shall be segregated and invested in accordance with rules prescribed by the Committee, and neither the Participant nor the alternate payee shall be entitled to make an election with respect to the investment of such segregated portion.

(b) The Committee’s decision with respect to compliance with any such court order or judgment shall be made in its absolute discretion and shall be binding upon the Trustee and all Participants and their Beneficiaries; provided, however, that the Committee in the exercise of its discretion shall not make payments in accordance with the terms of an order which is not a qualified domestic relations order or which the Committee determines would jeopardize the continued qualification of the Plan and Trust under Section 401 of the Code. Notwithstanding the foregoing, the Committee may make a distribution to an alternate payee prior to the date the Participant attains age fifty (50), if such distribution is required by a qualified domestic relations order.

(c) Neither the Plan, the Company, the Committee nor the Trustee shall be liable in any manner to any person, including any Participant or Beneficiary, for complying with any such court order or judgment.

(d) Nothing in this Section 15.2 shall be interpreted as placing upon the Company, the Committee or any Trustee any duty or obligation to comply with any such court order or judgment. The Committee may, if in its absolute discretion it deems it to

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be in the best interests of the Plan and the Participants, determine that any such court order or judgment shall be resisted by means of judicial appeal or other available judicial remedy, and in that event the Trustee shall act in accordance with the Committee’s directions.

(e) The Committee shall adopt procedures and provide notifications to a Participant and alternate payees in connection with a qualified domestic relations order, to the extent required under Code Section 414(p).

ARTICLE XVI

PLAN AMENDMENTS

16.1 Amendments.

The Committee may at any time, and from time to time, amend the Plan; provided that, the Board of Directors, or any committee delegated such authority by the Board of Directors, must approve any significant changes in the Plan design and any amendments to the Plan that are likely to result in a significant cost increase to the Company or that will provide supplemental or disproportionately more favorable benefits to officers of the Company. Any amendment shall be documented by an instrument in writing executed in the name of the Company by an officer or officers duly authorized to execute such instrument, and delivered to the applicable Trustee. However, to the extent required by law, no amendment shall be made at any time, the effect of which would be:

(a) To cause any assets of the Trust Fund to be used for or diverted to purposes other than providing benefits to the Participants and their Beneficiaries, and defraying reasonable expenses of administering the Plan, except as provided in Section 6.7;

(b) To have any retroactive effect so as to deprive any Participant or Beneficiary of any accrued benefit to which he would be entitled under this Plan, in contravention of Code Section 411(d)(6), if his employment were terminated immediately before the amendment;

(c) To eliminate or reduce an optional form of benefit to the extent so doing would contravene Code Section 411(d)(6); or

(d) To increase the responsibilities or liabilities of a Trustee or an Investment Manager without his written consent.

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16.2 Retroactive Amendments.

Notwithstanding any provisions of this Article XVI to the contrary, the Plan may be amended prospectively or retroactively (as provided in Section 401(b) of the Code) to make the Plan conform to any provision of ERISA, any Code provisions dealing with tax-qualified employees’ trusts, or any regulation under either.

16.3 Amendment of Vesting Provisions.

If the Plan is amended in any way that directly or indirectly affects the computation of a Participant’s vested interest in his Accounts, each Participant who has completed at least three (3) Years of Service may elect, within a reasonable time after the adoption of the amendment, to continue to have his vested interest computed under the Plan without regard to such amendment. The period during which the election may be made shall commence when the date of the amendment is adopted and shall end on the latest of: (i) 60 days after the amendment is adopted; (ii) 60 days after the amendment is effective; or (iii) 60 days after the Participant is issued written notice of the amendment.

In the event that the Plan’s vesting schedule is amended, the nonforfeitable percentage of every Employee who is a Participant on the date the amendment is adopted, or the date the amendment is effective, if later, in his Company Matching Account and/or Company Contributions Account shall be not less than his percentage computed under the Plan without regard to the amendment.

ARTICLE XVII

TOP-HEAVY PROVISIONS

17.1 Minimum Company Contributions.

In the event that this Plan is deemed a Top-Heavy plan with respect to any Plan Year, each Non-Key Employee who is a Participant shall receive Company contributions that in the aggregate are at least equal to the lesser of three percent (3%) of Compensation or the percentage at which Company contributions are made for the Key Employee (under any plan required to be included in an Aggregation Group) for whom such percentage is the highest for the Plan Year, regardless of whether the Non-Key Employee elected to make Before-Tax Contributions to the Plan for the Plan Year, completed less than 1,000 Hours of Service during such Plan Year, or the Non-Key Employee’s level of Compensation. For purposes of this Section 17.1, (A) Company

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contributions shall include (i) amounts considered contributed by Key Employees and which qualify for treatment under Code Section 401(k) and (ii) any Company contributions for Key Employees or Non-Key Employees taken into account under Section 401(k)(3) or 401(m) of the Code and (B) Company contributions shall not include amounts considered as contributed by Non-Key Employees and which qualify for treatment under Code Section 401(k). Further, in determining the percentage at which Company contributions are made for the Plan Year for the Key Employee for whom such percentage is the highest, the contributions for a Key Employee shall be divided by so much of a Key Employee’s compensation for the Plan Year as does not exceed $200,000, as that amount is adjusted each year by the Secretary of the Treasury.

In the event a Participant is covered by both a defined contribution and a defined benefit plan maintained by the Company, both of which are determined to be Top-Heavy Plans, the defined benefit minimum, offset by the benefits provided under the defined contribution plan, shall be provided under the defined benefit plan.

17.2 Compensation.

For the purpose of calculating Company contributions to be made to a Participant for Plan Years commencing prior to January 1, 1989, the annual Compensation taken into account for any Employee shall not exceed $200,000 (increased by any adjustments made pursuant to Section 416(d)(2) of the Code or regulations thereunder) if the Plan is deemed a Top-Heavy Plan with respect to any Plan Year.

17.3 Top-Heavy Determination.

This Plan shall be deemed a Top-Heavy Plan with respect to any Plan Year in which, as of the Determination Date: (a) the aggregate of the Accounts of Key Employees under the Plan exceeds 60% of the aggregate of the Accounts of all Employees; or (b) the aggregate of the Accounts of Key Employees under all defined contribution plans and the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans includable in an Aggregation Group exceed 60% of a similar sum for all employees in such group. As used above, the term “Aggregation Group” includes all plans of Participating Companies having one or more Key Employees as Participants and any other defined contribution plan of a Participating Company that permits a plan of a Participating Company having one or more Key Employees to meet the qualification requirements of Sections 401(a)(4) or 410 of the Code.

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The present value of account balances under a defined contribution plan shall be determined as of the most recent valuation date that falls within or ends on the Determination Date. The present value of accrued benefits under a defined benefit plan shall be determined as of the same valuation date used for computing plan costs for minimum funding. The present value of the cumulative accrued benefits of a Non-Key Employee shall be determined under either:

(i) the method, if any, that uniformly applies for accrual purposes under all plans maintained by affiliated companies, within the meaning of Code Sections 414(b), (c), (m) or (o); or

(ii) if there is no such method, as if such benefit accrued not more rapidly than the lowest accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code.

For purposes of this Article XVII, “Determination Date” shall mean, with respect to any Plan Year, the last day of the preceding Plan Year, or, in the case of the first Plan Year, the last day of such Plan Year.

The term, “Key Employee” shall mean, for purposes of this Article XVII, any Employee or former Employee (including any deceased Employee) who, at any time during the Plan Year that includes the Determination Date was:

(1) an officer of a Participating Company having annual compensation in excess of $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002);

(2) a 5% owner of a Participating Company; or

(3) a 1% owner of a Participating Company having annual compensation in excess of $150,000.

For purposes of (1) above, no more than 50 Employees (or, if lesser, the greater of 3 or 10% of the Employees) shall be treated as officers.

For this purpose, annual compensation means compensation within the meaning of Section 415(c) of the Code.

A 5% (or 1%, if applicable) owner means any person who owns (or is considered as owning within the meaning of Section 318 of the Code) more than 5% (1%) of the outstanding

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stock of the Participating Company or stock possessing more than 5% (1%) of the total combined voting power of all stock of the Participating Company.

For purposes of applying the constructive ownership rules under Section 318(a)(2) of the Code, subparagraph (C) of such Section shall be applied by substituting “5 percent” for “50 percent.”

For purposes of determining “5% owners” and/or “1% owners,” the aggregating rules of Sections 414(b), (c) and (m) of the Code shall not apply. For purposes of determining whether an Employee has compensation of more than $150,000, however, compensation from each entity required to be aggregated under Sections 414(b), (c) and/or (m) of the Code shall be taken into account.

For purposes of determining the amount of a Participant’s Account for purposes of this Section 17.3, the amount shall include the aggregate distributions under the Plan made to or with respect to the Participant during the one year period ending on the Determination Date. In the case of a distribution made for a reason other than separation from Service, death or disability, this paragraph shall be applied by substituting “five year period” for “one year period.

The following shall not be taken into account for purposes of determining whether this Plan is a Top-Heavy Plan: (1) any rollover to the Plan that is initiated by a Participant; (2) the account value of any Participant who is not a Key Employee with respect to any Plan Year but was a Key Employee with respect to any prior Plan Year; and (3) the account value of a Participant who has not performed services for any Participating Company during the one year period ending on the Determination Date.

17.4 Aggregation.

Each Plan of a Participating Company required to be included in an “Aggregation Group” shall be treated as a Top-Heavy Plan if such group is a “Top-Heavy Group.”

For purposes of this Article XVII, an “Aggregation Group” shall mean: (i) each plan of a Participating Company in which a Key Employee is a Participant, and (ii) each other plan of a Participating Company which enables any plan described in (i) above to meet the requirements of Section 401(a)(4) or 410 of the Code.

Any plan of a Participating Company that is not required to be included in an Aggregation Group may be treated as part of such group if such group would continue to meet the requirements of Section 401(a)(4) and 410 of the Code with such plan taken into account.

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For purposes of this Section 17.4, a “Top-Heavy Group” means any Aggregation Group if the sum (as of the Determination Date) of the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in such group and the aggregate of the accounts of Key Employees under all defined contribution plans included in such group exceed 60% of a similar sum determined for all Employees.

ARTICLE XVIII

MISCELLANEOUS

18.1 No Enlargement of Employee Rights.

(a) This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Employee, or to be consideration for, or an inducement to, or a condition of, the employment of any Employee.

(b) Nothing contained in this Plan or the Trust shall be deemed to give any Employee the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge or retire any Employee at any time.

(c) No Employee, nor any other person, shall have any right to or interest in any portion of the Trust Fund other than as specifically provided in this Plan.

18.2 Mailing of Payments; Lapsed Benefits.

(a) All payments under the Plan shall be delivered in person or mailed to the last address of the Participant (or, in the case of the death of the Participant, to the last address of any other person entitled to such payments under the terms of the Plan) furnished pursuant to Section 18.3 below.

(b) In the event that a benefit is payable under this Plan to a Participant or any other person and after reasonable efforts such person cannot be located for the purpose of paying the benefit for a period of three (3) consecutive years, upon the termination of such three (3) year period the Committee in its sole discretion may provide that the benefit be forfeited and as soon thereafter as practicable the benefit shall be applied to reduce future Company Contributions; provided, however, should any person entitled to such benefit thereafter claim such benefit, such benefit shall be restored. Alternatively,

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benefits that cannot be paid may escheat to the state in accordance with applicable state law.

(c) For purposes of this Section 18.2, the term “Beneficiary” shall include any person entitled under Section 8.9 to receive the interest of a deceased Participant or deceased designated Beneficiary. It is the intention of this provision that the benefit will be distributed to an eligible Beneficiary in a lower priority category under Section 8.9 if no eligible Beneficiary in a higher priority category can be located by the Committee after reasonable efforts have been made.

(d) The Accounts of a Participant shall continue to be maintained until the amounts in the Accounts are paid to the Participant or his Beneficiary. Notwithstanding the foregoing, in the event that the Plan is terminated, the following rules shall apply:

(i) All Participants (including Participants who have not previously claimed their benefits under the Plan) shall be notified of their right to receive a distribution of their interests in the Plan;

(ii) All Participants shall be given a reasonable length of time, which shall be specified in the notice, in which to claim their benefits;

(iii) All Participants (and their Beneficiaries) who do not claim their benefits within the designated time period shall be presumed to be dead. The Accounts of such Participants shall be forfeited at such time. These forfeitures shall be disposed of according to rules prescribed by the Committee, which rules shall be consistent with applicable law.

(iv) The Committee shall prescribe such rules as it may deem necessary or appropriate with respect to the notice and forfeiture rules stated above.

(e) Should it be determined that the preceding rules relating to forfeiture of benefits upon Plan termination are inconsistent with any of the provisions of the Code and/or ERISA, these provisions shall become inoperative without the need for a Plan amendment and the Committee shall prescribe rules that are consistent with the applicable provisions of the Code and/or ERISA.

18.3 Addresses.

Each Participant shall be responsible for furnishing the Committee with his correct current address and the correct current name and address of his Beneficiary or Beneficiaries.

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18.4 Notices and Communications.

(a) All applications, notices, designations, elections, and other communications from Participants shall be in writing, on forms prescribed by the Committee and shall be mailed or delivered to the office designated by the Committee, and shall be deemed to have been given when received by that office.

(b) Each notice, report, remittance, statement and other communication directed to a Participant or Beneficiary shall be in writing and may be delivered in person or by mail. An item shall be deemed to have been delivered and received by the Participant when it is deposited in the United States Mail with postage prepaid, addressed to the Participant or Beneficiary at his last address of record with the Committee.

18.5 Reporting and Disclosure.

The Plan Administrator shall be responsible for the reporting and disclosure of information required to be reported or disclosed by the Plan Administrator pursuant to ERISA or any other applicable law.

18.6 Governing Law.

All legal questions pertaining to the Plan shall be determined in accordance with the provisions of ERISA and the laws of the State of California. All contributions made hereunder shall be deemed to have been made in California.

18.7 Interpretation.

(a) Article and Section headings are for convenient reference only and shall not be deemed to be part of the substance of this instrument or in any way to enlarge or limit the contents of any Article or Section. Unless the context clearly indicates otherwise, masculine gender shall include the feminine, and the singular shall include the plural and the plural the singular.

(b) The provisions of this Plan shall in all cases be interpreted in a manner that is consistent with this Plan satisfying:

(i) The requirements (of Code Section 401(a) and related statutes) for qualification as a Profit Sharing Plan; and

(ii) The requirements (of Code Section 401(k) and related statutes) for qualification as a Qualified Cash or Deferred Arrangement.

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18.8 Certain Securities Laws Rules.

Any election or direction made under this Plan by an individual who is or may become subject to liability under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), may be conditioned upon such restrictions as are necessary or appropriate to qualify for an applicable exemption under Section 16(b) of the Exchange Act, or any rule promulgated thereunder. To the extent required by Section 401(a)(4) of the Code, the rules under this Section 18.8 shall be administered in a non-discriminatory manner.

18.9 Withholding for Taxes.

Any payments out of the Trust Fund may be subject to withholding for taxes as may be required by any applicable federal or state law.

18.10 Limitation on Company; Committee and Trustee Liability.

Any benefits payable under this Plan shall be paid or provided for solely from the Trust Fund and neither the Company, the Committee nor the Trustee assume any responsibility for the sufficiency of the assets of the Trust to provide the benefits payable hereunder.

18.11 Successors and Assigns.

This Plan and the Trust established hereunder shall inure to the benefit or, and be binding upon, the parties hereto and their successors and assigns.

18.12 Counterparts.

This Plan document may be executed in any number of identical counterparts, each of which shall be deemed a complete original in itself and may be introduced in evidence or used for any other purpose without the production of any other counterparts.

18.13 Military Service.

Notwithstanding any provision of this Plan to the contrary, the Plan shall provide contributions, benefits and service credit with respect to qualified military service in accordance with Code Section 414(u). Loan repayments shall be suspended under this Plan as permitted under Code Section 414(u).

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IN WITNESS WHEREOF, in order to record the adoption of this Plan, Mattel, Inc. has caused this instrument to be executed by its duly authorized officers this 19 day of December, 2006, effective, however, as of January 1, 2006, except as otherwise expressly provided herein.

MATTEL, INC.
By:	/s/ Alan Kaye

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EX-10.109

EXHIBIT 10.109

MATTEL, INC.

KEY EXECUTIVE LIFE INSURANCE PLAN

1. Purpose

The purpose of the Mattel, Inc. Key Executive Life Insurance Plan (the “Plan”) is to create a plan under which Mattel, Inc. (“Mattel”) can assist certain of its Executives in acquiring life insurance coverage.

2. Definitions

For purposes of this Plan, the following terms have the meanings set forth below:

Section 2.01 Agreement means the Agreement executed by a Participant implementing the terms of this Plan.

Section 2.02 Alternative Death Benefit Amount means, with respect to a Participant, an amount that, after subtracting any Mattel federal, state, and local income tax savings resulting from the deductibility of the payment for corporate tax purposes, is equal to the Participant’s Coverage Amount. The Alternative Death Benefit Amount shall be determined at the time the payment is to be made, based on Mattel’s federal, state and local income tax rate (calculated at the highest marginal tax rate then applicable to Mattel, net of any federal deduction for state and local taxes) at the time of the payment, and shall be determined by Mattel.

Section 2.03 Assignee means that person or entity to whom the Participant has assigned his or her interest in the Policy by designating such Assignee on forms provided by Mattel.

Section 2.04 Basic Coverage Amount means the insurance death benefit amount specified as such in the Participant’s Agreement.

Section 2.05 Change in Control means a Change in Control of Mattel, as such term is defined in the Mattel, Inc. Deferred Compensation Benefit Plans Trust Agreement executed on July 17, 1996 and amended thereafter.

Section 2.06 Committee means the Compensation/Options Committee of the Board of Directors of Mattel.

Section 2.07 Effective Date means June 1, 1997.

Section 2.08 Executive means an employee of Mattel who the Plan Administrator determines is eligible to participate in the Plan.

Section 2.09 Insurer means, with respect to a Participant’s Policy, the insurance company issuing the Policy on the Participant’s life pursuant to the provisions of the Plan.

Section 2.10 Optional Coverage Amount means the insurance death benefit amount specified as such in the Participant’s Agreement.

Section 2.11 Participant means an eligible Executive who elects to participate in the Plan.

Section 2.12 Permanent Policy means a Participant’s Policy that is projected to have Policy cash values at least equal to the Participant’s Coverage Amount when the Participant reaches age 95 and a Policy death benefit equal to at least 125% of the sum of the Participant’s Basic and Optional Coverage Amounts at all times prior to the Maturity Date, considering premiums paid prior to the time the determination is made, as well as future projected premiums. The determination shall be made by Mattel based on projections provided by the Insurer or its agent. Projections shall be based on then current mortality charges and a gross crediting rate on policy cash values of 5%.

Section 2.13 Plan Administrator means the Committee.

Section 2.14 Policy means the life insurance coverage acquired on the life of the Participant by the owner of the Policy.

Section 2.15 Policy Surrender Value means, with respect to a Participant’s Policy, the actual cash surrender value of the Policy, net of any applicable surrender charges, that would be available upon a complete surrender of the Policy.

Section 2.16 Premium means, with respect to a Participant’s Policy, the amount paid to the Insurer with respect to a Participant’s Policy.

Section 2.17 Vested Executive means an Executive who is either: (i) age 55 or older and who has five or more Years of Service; or (ii) vested in benefits payable under the Mattel, Inc. Supplemental Executive Retirement Plan.

Section 2.18 Years of Service shall have the definition specified in the Mattel, Inc. Supplemental Executive Retirement Plan.

3. Eligibility and Coverage Amount

The eligibility of an Executive, as well as the applicable Basic and Optional Coverage Amount, will be determined by the Plan Administrator.

If, during the insurance application and underwriting process, it is determined that the Executive’s health is such that the cost of the insurance would be prohibitive, the Plan Administrator, in its sole discretion, may determine that the Executive will not be eligible to participate in the Plan, provide a reduced Basic and/or Optional Coverage Amount, or take any other action it deems appropriate.

4. Type of Coverage

A Participant will be provided with life insurance coverage on the Participant’s life equal to the Basic Coverage Amount. A Participant will be able to choose additional coverage equal to the Participant’s Optional Coverage Amount.

5. Payment of Premiums

Section 5.01 Mattel Payments. Subject to Sections 7.01, 7.02, 12.01 and 12.02, Mattel shall pay all Policy Premiums necessary to maintain the Policy death benefit at a level at least equal to the Participant’s Basic Coverage Amount and, if elected, Optional Coverage Amount.

Section 5.02 Pre-Retirement Participant Payments. Any Participant electing Optional Coverage shall be required to contribute towards the cost of such coverage by paying an amount equal to the one year term cost for the coverage, determined based on the Participant’s age at the beginning of the Policy year, the Insurer’s published one year term rates in effect at the beginning of the Policy year, and the Participant’s Optional Coverage Amount under the Plan. The amount shall be determined pursuant to the guidelines set forth in Revenue Ruling 66-110 and Revenue Ruling 67154, and shall be conclusively determined by the Plan Administrator.

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Section 5.03 Post-Retirement Participant Payments. If a Participant terminating employment qualifies as a Vested Executive, then the Participant can elect, at that time, to maintain his/her Optional Coverage Amount by paying to Mattel each year an amount equal to the Insurer’s mortality charges then applicable to the Participant’s Optional Coverage Amount. The amount shall be conclusively determined by the Plan Administrator.

6. Policy Ownership

Section 6.01 Ownership. Mattel shall be the owner of a Participant’s Policy and shall be entitled to exercise the rights of ownership, except that the following rights shall be exercisable by the Participant (or Assignee): (i) the right to designate the beneficiary or beneficiaries to receive payment of the portion of the death benefit under the Participant’s Policy equal to the Basic Coverage Amount and, if elected, Optional Coverage Amount; and (ii) the right to assign any part or all of the Participant’s rights under the Policy to any person, entity or trust by the execution of a written instrument prescribed by Mattel that is delivered to Mattel. Also, except as provided in Section 7, Mattel shall not borrow from, hypothecate, surrender in whole or in part, cancel, or in any other manner encumber a Participant’s Policy without the prior written consent of the Participant (or Assignee).

Section 6.02 Possession of Policy. Mattel shall keep possession of the Policy. Mattel agrees to make the Policy available to the Participant (or Assignee) or to the Insurer at such times as, and on such terms as, Mattel determines for the sole purposes of endorsing or filing any change of beneficiary or assignment on the Policy.

7. Termination Events

Section 7.01 Termination Events. Except as provided in Section 7.02, Mattel’s obligation to pay Premiums with respect to a Participant’s Policy shall terminate:

a. Automatically upon the death of the Participant.

b. Upon the written action of the Plan Administrator if the Participant terminates employment with Mattel (or any subsidiary or affiliate of Mattel) prior to being a Vested Executive.

c. Upon the mutual agreement of Mattel and the Participant (or Assignee).

Section 7.02 Irrevocable Obligation. Notwithstanding any other provision of the Plan, (i) Mattel’s obligation to pay Policy Premiums for a Participant who meets the requirements for a Vested Executive shall be irrevocable while such person is employed by Mattel and shall remain irrevocable thereafter; and (ii) Mattel’s obligation to pay Policy Premiums for a Participant who obtains an irrevocable right pursuant to the provisions of Section 9 hereof relating to Change in Control thereafter shall be irrevocable.

Section 7.03 Allocation of Death Benefit. In the event of a termination due to the death of the Participant, the death benefit under the Participant’s Policy shall be divided as follows:

a. The beneficiary or beneficiaries of the Participant (or Assignee) shall be entitled to receive an amount equal to the Basic Coverage Amount and, if elected, Optional Coverage Amount.

b. Mattel shall be entitled to receive the excess of the death benefit.

Mattel agrees to execute an endorsement to the Policy issued to it by the Insurer providing for the division of the death benefit in accordance with the provisions of this Section.

Notwithstanding the provisions of this Section, if the Policy death benefit becomes payable while there is an Alternative Death Benefit Election in effect for the Participant pursuant to Section 8, then the entire Policy death benefit shall be paid to Mattel.

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Section 7.04 Disposition of Policy. If a Participant’s Agreement terminates under Section 7.01(b) or (c), the Participant (or Assignee) may acquire the Participant’s Policy from Mattel by paying Mattel an amount equal to the Policy Surrender Value (or any lesser amount determined by the Plan Administrator). In order to exercise this right, the person entitled to exercise the right shall notify Mattel, in writing, of the intention to exercise the option to purchase the policy within sixty (60) days following the event of termination. If Mattel is so notified, Mattel shall, within thirty (30) days after being notified, provide a written notice to the Participant (or Assignee) indicating the payment amount required. Within thirty (30) days after receiving such notice from Mattel, the Participant (or Assignee) shall make the required payment to Mattel. If the payment is not made within the required time, the right to acquire the Policy shall terminate. If the required payment is received on a timely basis, Mattel shall submit to the Insurer, within thirty (30) business days after receiving the payment, the forms required to transfer the Policy ownership to the Participant (or Assignee). If the Participant (or Assignee) does not exercise his or her rights to acquire the Participant’s Policy, the Participant’s (or Assignee’s) rights under the Plan shall terminate, and Mattel thereafter, may take any action it deems appropriate with respect to the Participant’s Policy free from any restrictions or limitations imposed by the Plan.

Section 7.05 Termination of Optional Coverage Amount. In addition to the termination events specified in Section 7.01, any Optional Coverage Amount shall terminate if the Participant (or Assignee) fails to pay the applicable premium amount specified in Sections 5.02 and 5.03 within sixty (60) days following written notice by Mattel to the Participant (and, if applicable, Assignee) of the amount payable.

8. Alternative Death Benefit Election

A Participant (or Assignee) may elect to receive an Alternative Death Benefit in lieu of the insurance benefit provided under the Plan. The Alternative Death Benefit shall be paid by Mattel from the general funds of Mattel, and shall not constitute an insurance benefit. It shall be paid by Mattel to the Participant’s (or Assignee’s) beneficiary at the Participant’s death. The amount of the payment shall be equal to the Alternative Death Benefit Amount. As long as an Alternative Death Benefit Election is in effect, the beneficiary or beneficiaries of the Participant (or Assignee) shall receive the Alternative Death Benefit only, and shall not be entitled to receive any portion of any death benefits that become payable under the Participant’s Policy, and the Participant (or Assignee) shall cooperate with Mattel in effecting a change of beneficiary of the Participant’s Policy to achieve such result.

An election under this Section may be revoked. Any election (or revocation of an election) shall be in writing and shall be effective when received by Mattel. A Participant (or Assignee) shall not be limited in the number of times an Alternative Death Benefit Election can be made (or revoked).

9. Change in Control

If there is a Change in Control:

a. the Plan and Mattel’s obligation to pay Policy Premiums hereunder shall become irrevocable for all Participants in the Plan at the time of the Change in Control;

b. Mattel immediately shall transfer the ownership of all Participants’ Policies to an irrevocable trust to: 1) pay any premiums projected to be payable on all Participants’ Policies after the Change in Control, in order to qualify each Participant’s Policy as a Permanent Policy, and 2) pay any Alternative Death Benefit that becomes payable under Section 8 of this Plan; and

c. Mattel immediately shall fund such irrevocable trust with an amount sufficient to pay all necessary projected future premiums for all Participants’ Policies in order to qualify each Participant’s Policy as a Permanent Policy.

Notwithstanding the creation and funding of an irrevocable trust in accordance with the provisions of this Section, Mattel, or its successor, shall continue to be responsible for the premium costs associated with the

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Participants’ Policies and any Alternative Death Benefits payable under Section 8, if such amounts are not paid by the trust for any reason, or if the trust’s assets become insufficient to pay any required amounts.

10. Governing Laws & Notices

Section 10.01 Governing Law. This Plan shall be governed by and construed in accordance with the substantive law of the State of California without giving effect to the choice of law rules of the State of California.

Section 10.02 Notices. All notices hereunder shall be in writing and sent by first class mail with postage prepaid. Any notice to Mattel shall be addressed to the Attention of the General Counsel at Mattel, Inc., 333 Continental Boulevard, El Segundo, CA 90245-5012. Any notice to the Participant (or Assignee) shall be addressed to the Participant (or Assignee) at the address following such party’s signature on his or her Agreement. Any party may change the address for such party herein set forth by giving written notice of such change to the other parties pursuant to this Section.

11. Miscellaneous Provisions

Section 11.01 This Plan and any Agreement executed hereunder shall not be deemed to constitute a contract of employment between an Executive and Mattel, or a Participant and Mattel, nor shall any provision restrict the right of Mattel to discharge an Executive or Participant, or restrict the right of an Executive or Participant to terminate employment.

Section 11.02 The masculine pronoun includes the feminine and the singular includes the plural where appropriate.

Section 11.03 In order to be eligible to participate in this Plan, the Participant shall cooperate with the Insurer by furnishing any and all information requested by the Insurer in order to facilitate the issuance of the Policy, including furnishing such medical information and taking such physical examinations as the Insurer may deem necessary. In the absence of such cooperation, Mattel shall have no further obligation to the Participant to allow him to begin participation in the Plan.

Section 11.04 If a Participant commits suicide within two years of the Participant Policy’s issue, or if the Participant makes any material misstatement of information or nondisclosure of medical history and dies within two years of the Participant’s Policy’s issue, then no benefits will be payable to the beneficiary of such Participant (or Assignee).

12. Amendment, Termination, Administration, and Successors

Section 12.01 Amendment. This Plan may be modified or amended by Mattel at any time, but an amendment that affects the rights, benefits or obligations of a Participant (or Assignee) for whom Mattel’s obligation to pay premiums has become irrevocable under Section 7.02 will not apply to such Participant (or Assignee) unless such Participant (or Assignee) consents, in writing, to the amendment.

Section 12.02 Termination. The Directors of Mattel may terminate the Plan at any time, but no such termination shall affect the rights, benefits or obligations of a Participant (or Assignee) for whom Mattel’s obligation to pay premiums has become irrevocable under Section 7.02 unless such Participant (or Assignee) consents, in writing, to such termination.

Section 12.03 Administration. This Plan shall be administered by the Plan Administrator. The Plan Administrator shall have the authority to make, amend, interpret, and enforce all rules and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of the Plan, as may arise in connection with the Plan in the Plan Administrator’s sole discretion. In the administration of this Plan, the Plan Administrator from time to time may employ agents and delegate to them or to others (including Executives) such administrative duties as it sees fit. The Plan Administrator from time to time may consult with counsel, who

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may be counsel to Mattel. The decision or action of the Plan Administrator (or its designee) with respect to any question arising out of or in connection with the administration, interpretation and application of this Plan shall be final and conclusive and binding upon all persons having any interest in the Plan. Mattel shall indemnify and hold harmless the Plan Administrator and any Executives to whom administrative duties under this Plan are delegated, against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of gross negligence or willful misconduct by the Plan Administrator.

Section 12.04 Successors. The terms and conditions of this Plan shall inure to the benefit of and bind Mattel and the Participant and their successors, assignees, and representatives.

13. Claims Procedure; Plan Information

Section 13.01 Named Fiduciary. The Plan Administrator is hereby designated as the named fiduciary under this Plan. The named fiduciary shall have authority to control and manage the operation and administration of this Plan.

Section 13.02 Claims Procedures. Any controversy or claim arising out of or relating to this Plan shall be filed with the Plan Administrator, Mattel, Inc., 333 Continental Boulevard, El Segundo, CA 90245-5012, Attention: Secretary. The Plan Administrator shall make all determinations concerning such claim. Any decision by the Plan Administrator denying such claim shall be in writing and shall be delivered to all parties in interest in accordance with the notice provisions of Section 10.02 hereof. Such decision shall set forth the reasons for denial in plain language. Pertinent provisions of the Plan shall be cited and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. This notice of denial of benefits will be provided within 90 days of the Plan Administrator’s receipt of the claimant’s claim for benefits. if the Plan Administrator fails to notify the claimant of its decision regarding the claim, the claim shall be considered denied, and the claimant then shall be permitted to proceed with the appeal as provided in this Section.

A claimant who has been completely or partially denied a benefit shall be entitled to appeal this denial of his/her claim by filing a written statement of his/her position with the Plan Administrator no later than sixty (60) days after receipt of the written notification of such claim denial. The Plan Administrator shall schedule an opportunity for a full and fair review of the issue within thirty (30) days of receipt of the appeal. The decision on review shall set forth specific reasons for the decision, and shall cite specific references to the pertinent Plan provisions on which the decision is based.

Following the review of any additional information submitted by the claimant, either through the hearing process or otherwise, the Plan Administrator shall render a decision on the review of the denied claim in the following manner:

a. The Plan Administrator shall make its decision regarding the merits of the denied claim within 60 days following receipt of the request for review (or within 120 days after such receipt, in a case where there are special circumstances requiring extension of time for reviewing the appealed claim). The Plan Administrator shall deliver the decision to the claimant in writing. If an extension of time for reviewing the appealed claim is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the decision on review is not furnished within the prescribed time, the claim shall be deemed denied on review.

b. The decision on review shall set forth specific reasons for the decision, and shall cite specific references to the pertinent Plan provisions on which the decision is based.

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EX-11.0

EXHIBIT 11.0

MATTEL, INC. AND SUBSIDIARIES

COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE

	For the Year
BASIC	2006		2005		2004		2003		2002
	(In thousands, except per share amounts)
Income from continuing operations	$	592,927	$	417,019	$	572,723	$	537,632	$	455,042
Gain from discontinued operations, net of tax		—		—		—		—		27,253
Cumulative effect of change in accounting principles, net of tax		—		—		—		—		(252,194	)
Net income applicable to common shares	$	592,927	$	417,019	$	572,723	$	537,632	$	230,101
Applicable Shares for Computation of Net Income Per Share:
Weighted average common shares outstanding		382,921		407,402		419,235		437,020		435,790
Net Income Per Common Share—Basic:
Income from continuing operations	$	1.55	$	1.02	$	1.37	$	1.23	$	1.04
Gain from discontinued operations		—		—		—		—		0.06
Cumulative effect of change in accounting principles		—		—		—		—		(0.58	)
Net income per common share	$	1.55	$	1.02	$	1.37	$	1.23	$	0.52
DILUTED
Income from continuing operations	$	592,927	$	417,019	$	572,723	$	537,632	$	455,042
Gain from discontinued operations, net of tax		—		—		—		—		27,253
Cumulative effect of change in accounting principles, net of tax		—		—		—		—		(252,194	)
Net income applicable to common shares	$	592,927	$	417,019	$	572,723	$	537,632	$	230,101
Applicable Shares for Computation of Net Income Per Share:
Weighted average common shares outstanding		382,921		407,402		419,235		437,020		435,790
Weighted average common equivalent shares arising from:
Dilutive stock options and restricted stock		3,501		3,637		3,858		5,211		5,355
Stock subscription and other warrants		—		—		—		—		147
Weighted average number of common and common equivalent shares		386,422		411,039		423,093		442,231		441,292
Net Income Per Common Share—Diluted:
Income from continuing operations	$	1.53	$	1.01	$	1.35	$	1.22	$	1.03
Gain from discontinued operations		—		—		—		—		0.06
Cumulative effect of change in accounting principles		—		—		—		—		(0.57	)
Net income per common share	$	1.53	$	1.01	$	1.35	$	1.22	$	0.52

EX-12.0

EXHIBIT 12.0

MATTEL, INC. AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

	For the Year
(Unaudited; in thousands, except ratios)	2006			2005			2004			2003			2002
Earnings Available for Fixed Charges:
Income from continuing operations before income taxes and cumulative effect of changes in accounting principles	$	683,756		$	652,049		$	696,254		$	740,854		$	621,497
Add: Minority interest losses (income) in consolidated subsidiaries		271			142			(93	)		345			126
Add:
Interest expense		79,853			76,490			77,764			80,577			113,897
Appropriate portion of rents (a)		25,724			20,475			18,831			16,627			16,615
Earnings available for fixed charges	$	789,604		$	749,156		$	792,756		$	838,403		$	752,135
Fixed Charges:
Interest expense	$	79,853		$	76,490		$	77,764		$	80,577		$	113,897
Capitalized interest		—			—			—			—			43
Appropriate portion of rents (a)		25,724			20,475			18,831			16,627			16,615
Fixed charges	$	105,577		$	96,965		$	96,595		$	97,204		$	130,555
Ratio of earnings to fixed charges		7.48	X		7.73	X		8.21	X		8.63	X		5.76	X

(a) Portion of rental expenses which is deemed representative of an interest factor, which is one-third of total rental expense.

EX-21.0

EXHIBIT 21.0

SUBSIDIARIES OF MATTEL, INC.

Subsidiaries1	Jurisdiction in Which Organized	Percentage of Voting Securities Owned Directly or Indirectly By Parent2
American Girl, Inc.	Delaware	100	%
Mattel Asia Pacific Sourcing Limited	Hong Kong	100	%
Mattel Europa B.V.	The Netherlands	100	%
Mattel Europe Holdings B.V.	The Netherlands	100	%
Mattel Europe Marketing B.V.	The Netherlands	100	%
Mattel Finance, Inc.	Delaware	100	%
Mattel Foreign Holdings Ltd.	Bermuda	100	%
Mattel International Finance B.V.	The Netherlands	100	%
Mattel International Holdings B.V.	The Netherlands	100	%
Mattel Investment, Inc.	Delaware	100	%
Mattel Marketing Holdings Pte. Ltd.	Singapore	100	%
Mattel Overseas Operations Ltd.	Bermuda	100	%
Mattel Overseas, Inc.	California	100	%
Mattel Sales Corp.	California	100	%

¹ All of the subsidiaries listed above are included in the consolidated financial statements. Inactive subsidiaries and subsidiaries that, when considered in the aggregate, do not constitute a significant subsidiary have not been included in the above list.

² Parent refers to Mattel, Inc. (a Delaware corporation) and excludes Directors’ qualifying shares.

EX-23.0

EXHIBIT 23.0

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-134740) and Form S-8 (No. 33-34920, No. 33-51454, No. 33-57082, No. 33-62185, No. 333-01061, No. 333-03385, No. 333-32294, No. 333-47461, No. 333-64984, No. 333-67493, No. 333-79099, No. 333-75145, No. 333-89458, No. 333-101200 and No. 333-125059) of Mattel, Inc. and its subsidiaries of our report dated February 26, 2007 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Los Angeles, California

February 26, 2007

EX-31.0

EXHIBIT 31.0

CERTIFICATION

I, Robert A. Eckert, certify that:

1. I have reviewed this annual report on Form 10-K of Mattel, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 26, 2007	By:
		Robert A. Eckert
		Chairman and Chief Executive Officer
		(Principal executive officer)

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Kevin M. Farr, certify that:

1. I have reviewed this annual report on Form 10-K of Mattel, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 26, 2007	By:
		Kevin M. Farr Chief Financial Officer (Principal financial officer)

EX-32.0

EXHIBIT 32.0

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned officers of Mattel, Inc., a Delaware corporation (the “Company”), does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Company’s Annual Report on Form 10-K for the period ended December 31, 2006 (the “Annual Report”), which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) Information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Annual Report.

Date: February 26, 2007	By:
		Robert A. Eckert Chairman and Chief Executive Officer, Mattel, Inc.
		Kevin M. Farr Chief Financial Officer, Mattel, Inc.