The following discussion should be read in conjunction with the consolidated financial information and related notes that appear in Part I, Item 1, of this Quarterly Report. Mattel's business is seasonal, and, therefore, results of operations are comparable only with corresponding periods.

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 ®; Polly Pocket®, Little Mommy®, Disney Classics, Pixel Chix ®, and High School Musical™ (collectively "Other Girls"); Hot Wheels®, Matchbox®, Speed Racer™, and Tyco® R/C vehicles and playsets (collectively "Wheels"); and CARS™, Radica®, Speed Racer ™, Batman®, and Kung Fu Panda™ 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®, Winnie the Pooh, Go-Diego-Go!™, 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.

Management believes that the business environment for Mattel for the remainder of 2008 will generally include retailers tightly managing inventory in light of current economic conditions and uncertainties and, in some cases, customers and vendors experiencing difficulty in obtaining the liquidity required to buy inventory or raw materials. Mattel believes that the demand for toys has held up relatively well during historic periods of economic difficulty. Also, Mattel expects to continue to experience cost pressures, including higher product costs for commodities, labor, and product testing, along with appreciating Asian currencies (collectively, "input costs"). Additionally, until all product recall-related litigation and MGA legal matters are resolved, Mattel expects to continue to incur significant legal expenses.

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 2008, 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-Third Quarter

Consolidated Results

Net sales for the third quarter of 2008 were $1.95 billion, up 6% as compared to $1.84 billion in 2007, including favorable changes in currency exchange rates of 2 percentage points. Net income for the third quarter of 2008 was $238.1 million, or $0.66 per diluted share, as compared to $236.8 million, or $0.61 per diluted share for the third quarter of 2007. Net income for the third quarter of 2008 was higher than 2007, primarily due to higher sales volume and lower product recall costs, partially offset by higher input costs and selling and administrative expenses. Operating income for the third quarter of 2007 was negatively impacted by approximately $40 million of product recall costs.

The following table provides a summary of Mattel's consolidated results for the third quarter of 2008 and 2007 (in millions, except percentage and basis point information):

                                         For the Three Months Ended September 30,
                                              2008                        2007               Year/Year Change
                                                    % of Net                   % of Net            Basis Points
                                      Amount         Sales        Amount        Sales       %      of Net Sales
Net sales                           $   1,946.3        100.0 %   $ 1,838.6        100.0 %    6 %              -

Gross profit                        $     900.1         46.2 %   $   864.7         47.0 %    4 %            (80 )
Advertising and promotion
expenses                                  223.8         11.5         211.4         11.5      6 %              -
Other selling and administrative
expenses                                  361.0         18.5         342.8         18.6      5 %            (10 )

Operating income                          315.3         16.2         310.5         16.9      2 %            (70 )
Interest expense                           20.4          1.0          16.4          0.9     25 %             10
Interest (income)                          (6.0 )       -0.3          (6.2 )       -0.3     -3 %              -
Other non-operating income, net            (6.2 )                     (7.4 )

Income before income taxes          $     307.1         15.8 %   $   307.7         16.7 %                   (90 )

Sales

Net sales for the third quarter of 2008 were $1.95 billion, up 6% as compared to $1.84 billion in 2007, including favorable changes in currency exchange rates of 2 percentage points. Gross sales within the US increased 4% in the third quarter of 2008, as compared to 2007, and accounted for 50.7% of consolidated gross sales in the third quarter of 2008, as compared to 51.2% of consolidated gross sales in 2007. Gross sales in international markets increased 7% in the third quarter of 2008, as compared to 2007, including favorable changes in currency exchange rates of 6 percentage points.

Worldwide gross sales of Mattel Girls & Boys Brands increased 6% in the third quarter of 2008 to $1.21 billion, with favorable changes in currency exchange rates of 4 percentage points. Domestic gross sales of Mattel Girls & Boys Brands increased 5% as compared to the third quarter of 2007 and international gross sales of Mattel Girls & Boys Brands increased 7%, with favorable changes in currency exchange rates of 6 percentage points. Worldwide gross sales of Barbie® decreased 1% as compared to the third quarter of 2007, with a 3 percentage point benefit from currency exchange rates, primarily driven by sales declines in My Scene® and Barbie® Collector products, partially offset by growth in Barbie ® Fantasy. Domestic gross sales of Barbie® increased 3% and International gross sales of Barbie ® decreased 2%, including favorable changes in currency exchange rates of 6 percentage points during the third quarter of 2008. Worldwide gross sales of Other Girls products increased 26%, including favorable changes in currency exchange rates of 3 percentage points, due

primarily to sales of High School Musical™ products and higher sales of Disney Princess ® products. Worldwide gross sales of Wheels products increased 7%, including favorable changes in currency exchange rates of 3 percentage points, due primarily to Speed Racer ™ sales and higher sales of Matchbox® and Tyco® R/C products. Worldwide gross sales of Entertainment products increased 3%, including favorable changes in currency exchange rates of 4 percentage points, driven primarily by sales of products tied to the Batman ®: The Dark Knight™ movie property, which more than offset the decline in CARS ™, a licensed brand that continues to have strong consumer demand more than two years after its theatrical release.

Worldwide gross sales of Fisher-Price Brands were $833.1 million, up 4% in the third quarter of 2008, including a 1 percentage point benefit from currency exchange rates. International gross sales of Fisher-Price Brands increased 6%, including a 3 percentage point benefit from currency exchange rates and domestic gross sales increased by 3%. Worldwide gross sales of Core Fisher-Price® increased 7%, including favorable changes in currency exchange rates of 1 percentage point. International gross sales of Core Fisher-Price® increased 15%, including a 4 percentage point benefit from currency exchange rates and domestic gross sales of Core Fisher-Price ® increased 3%. Core Fisher-Price® growth was primarily due to strong demand for new products such as Bounce and Learn ™ Smart Pony and Spike™ the Ultra Dinosaur. Worldwide gross sales of Fisher-Price® Friends decreased by 3%, with no impact from changes in currency exchange rates, primarily due to sales declines in Dora the Explorer® products, partially offset by growth in sales of Disney products.

American Girl Brands gross sales were $78.8 million, up 11% in the third quarter of 2008, as compared to $71.0 million in the third quarter of 2007, primarily as a result of strong sales of products tied to the Kit Kittredge® movie, and contributions from the American Girl Boutique and Bistros™ in Atlanta, Georgia and Dallas, Texas, which opened during the second half of 2007.

Cost of Sales

Cost of sales as a percentage of net sales was 53.8% in the third quarter of 2008 as compared to 53.0% in the third quarter of 2007. Cost of sales increased by $72.3 million, or 7%, from $973.9 million in the third quarter of 2007 to $1.05 billion in the third quarter of 2008, as compared to a 6% increase in net sales. Cost of sales increased primarily due to higher input costs, partially offset by lower product recall costs as compared to the third quarter of 2007. Within cost of sales, product costs increased by $53.3 million, or 7%, from $797.7 million in the third quarter of 2007 to $851.0 million in the third quarter of 2008. Royalty expense increased $3.6 million, or 5%, from $77.6 million in the third quarter of 2007 to $81.2 million in the third quarter of 2008. Freight and logistics expenses increased by $15.4 million, or 16%, from $98.6 million in the third quarter of 2007 to $114.0 million in the third quarter of 2008.

Gross Profit

Gross profit, as a percentage of net sales, was 46.2% in the third quarter of 2008 as compared to 47.0% in the third quarter of 2007. The decrease in gross profit was primarily driven by higher input costs, partially offset by the benefit of price increases, lower recall costs as compared to the third quarter of 2007, and foreign currency exchange benefits.

Advertising and Promotion Expenses

Advertising and promotion expenses remained flat at 11.5% of net sales in the third quarter of 2008 and 2007.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $361.0 million, or 18.5% of net sales in the third quarter of 2008 as compared to $342.8 million, or 18.6% of net sales, in the third quarter of 2007. The increase in absolute dollars of other selling and administrative expenses is primarily due to bad debt expense being approximately

$10 million higher, the impact of foreign currency exchange rates, and higher compensation expense related to stock options and restricted stock units ("RSUs"). Compensation expense related to stock options and RSUs totaled $11.7 million in the third quarter of 2008, as compared to $7.0 million in the third quarter of 2007.

Non-Operating Income (Expense)

Interest expense increased from $16.4 million in the third quarter of 2007 to $20.4 million in the third quarter of 2008, due to higher average borrowings, partially offset by lower average interest rates. Interest income decreased from $6.2 million in the third quarter of 2007 to $6.0 million in the third quarter of 2008, primarily due to lower average interest rates, partially offset by higher average invested cash balances. Other non-operating income was $6.2 million in the third quarter of 2008, due primarily to foreign currency exchange gains caused by local currency revaluation of US dollar cash balances held by a Latin American subsidiary, partially offset by an investment impairment charge of $4.0 million. Other non-operating income was $7.3 million in the third quarter of 2007, primarily due to foreign currency exchange gains caused by local currency revaluation of US dollar cash balances held by a Latin American subsidiary.

Provision for Income Taxes

Mattel's provision for income taxes was $69.0 million for the third quarter of 2008 as compared to $70.9 million for the third quarter of 2007. Mattel's provision for income taxes for the third quarter of 2008 is based on a year to date effective tax rate of 22.5%.

Business Segment Results

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.

Domestic Segment

Mattel Girls & Boys Brands US gross sales were $470.9 million in the third quarter of 2008, up $22.1 million or 5%, as compared to $448.8 million in the third quarter of 2007. Within this segment, gross sales of Barbie® products increased 3%, primarily driven by higher sales of Barbie® Fantasy products, partially offset by sales declines in Barbie® Collector products. Gross sales of Other Girls products increased 19%, primarily due to sales of High School Musical™ products and higher sales of Disney Princess® products. Gross sales of Wheels products increased 15% due to higher sales of Hot Wheels®, Tyco® R/C, Matchbox ®, and Speed Racer™ products. Gross sales of Entertainment products decreased 8%, primarily driven by sales declines in CARS ™ and Radica®, partially offset by increased sales of products tied to the Batman®: The Dark Knight™ movie property. Mattel Girls & Boys Brands US segment income decreased $10.4 million to $73.4 million in the third quarter of 2008 from $83.8 million in the third quarter of 2007, primarily driven by lower gross profit, partially offset by higher sales volume.

Fisher-Price Brands US gross sales increased 3% in the third quarter of 2008 as compared to the third quarter of 2007, primarily due to increased sales of Core Fisher-Price ® and Fisher-Price® Friends products. Fisher-Price Brands US segment income decreased $17.3 million to $94.9 million in the third quarter of 2008 from $112.2 million in the third quarter of 2007, primarily driven by lower gross profit, partially offset by higher sales volume.

American Girl Brands gross sales increased 11% in the third quarter of 2008, as compared to the third quarter of 2007, primarily as a result of strong sales of products tied to the Kit Kittredge® movie, and contributions from the American Girl Boutique and Bistros ™ in Atlanta, Georgia and Dallas, Texas, which opened during the second half of 2007. American Girl Brands had a segment loss of $0.02 million in the third quarter of 2008, compared to segment income of $3.3 million in the third quarter of 2007, primarily due to higher other selling and administrative expenses related to retail pre-opening costs, partially offset by higher sales volume.

International Segment

The following table provides a summary of percentage changes in gross sales
within the International segment for the third quarter of 2008 versus 2007:



                                                     Impact of Change
                                     % Change in       in Currency
               Non-US Regions:       Gross Sales        (in % pts)
               Total International             7                    6
               Europe                          2                    5
               Latin America                  18                    9
               Asia Pacific                   (2 )                  1
               Other                           2                    -

International gross sales increased by 7% in the third quarter of 2008 as compared to the third quarter of 2007, including favorable changes in currency exchange rates of 6 percentage points. Gross sales of Barbie® decreased 2% in the third quarter of 2008, including favorable changes in currency exchange rates of 6 percentage points, primarily due to sales declines in My Scene® and Barbie ® Collector products. Gross sales of Other Girls products increased 31% in the third quarter of 2008, including favorable changes in currency exchange rates of 6 percentage points, primarily due to sales of High School Musical™, Little Mommy®, and Hannah Montana® products. Gross sales of Wheels products increased 2%, including favorable changes in currency exchange rates of 7 percentage points, primarily due to Speed Racer™ sales. Gross sales of Entertainment products increased 12%, including favorable changes in currency exchange rates of 7 percentage points, driven primarily by sales of products tied to the Batman®:The Dark Knight™ movie property. Gross sales of Fisher-Price Brands increased 6%, including favorable changes in currency exchange rates of 3 percentage points, primarily driven by strong sales in Core Fisher-Price®, partially offset by sales declines of Fisher-Price® Friends products. International segment income was $167.7 million in the third quarter of 2008, up $2.7 million from $165.0 million in the third quarter of 2007, primarily due to higher sales volume, partially offset by higher other selling and administrative expenses and lower gross profit.

Results of Operations-First Nine Months

Consolidated Results

Net sales for the first nine months of 2008 were $3.98 billion, up 5% as compared to $3.78 billion in 2007, including favorable changes in currency exchange rates of 4 percentage points. Net income for the first nine months of 2008 was $203.2 million, or $0.56 per diluted share, as compared to net income of $271.5 million, or $0.68 per diluted share, for the first nine months of 2007. Net income for the first nine months of 2008 was negatively impacted by higher input costs and higher litigation expenses. Operating income for the first nine months of 2007 was negatively impacted by approximately $69 million of product recall costs.

The following table provides a summary of Mattel's consolidated results for the first nine months of 2008 and 2007 (in millions, except percentage and basis point information):

                                        For the Nine Months Ended September 30,
                                            2008                        2007                Year/Year Change
                                                  % of Net                   % of Net             Basis Points
                                     Amount        Sales        Amount        Sales        %      of Net Sales
Net sales                          $  3,978.0        100.0 %   $ 3,781.5        100.0 %     5 %              -

Gross profit                       $  1,792.2         45.1 %   $ 1,726.6         45.7 %     4 %            (60 )
Advertising and promotion
expenses                                443.6         11.2         423.9         11.2       5 %              -
Other selling and administrative
expenses                              1,039.2         26.1         934.7         24.7      11 %            140

Operating income                        309.4          7.8         368.0          9.7     -16 %           (190 )
Interest expense                         53.0          1.3          45.0          1.2      18 %             10
Interest (income)                       (21.8 )       -0.5         (28.6 )       -0.8     -24 %             30
Other non-operating expense
(income), net                            16.0                       (8.2 )

Income before income taxes         $    262.2          6.6 %   $   359.8          9.5 %                   (290 )

Sales

Net sales for the first nine months of 2008 were $3.98 billion, up 5% as compared to $3.78 billion in 2007, including favorable changes in currency exchange rates of 4 percentage points. Gross sales within the US were flat in the first nine months of 2008, as compared to 2007, and accounted for 48.8% of consolidated gross sales in the first nine months of 2008, as compared to 51.0% of consolidated gross sales in 2007. Gross sales in international markets increased 9% in the first nine months of 2008, as compared to 2007, including favorable changes in currency exchange rates of 8 percentage points.

Worldwide gross sales of Mattel Girls & Boys Brands increased 8% in the first nine months of 2008 to $2.53 billion, with favorable changes in currency exchange rates of 6 percentage points. Domestic gross sales of Mattel Girls & Boys Brands increased 4% as compared to the first nine months of 2007 and international gross sales increased 10%, with favorable changes in currency exchange rates of 9 percentage points. Worldwide gross sales of Barbie® decreased 2% as compared to the first nine months of 2007, with a 5 percentage point benefit from currency exchange rates. During the first nine months of 2008, domestic gross sales of Barbie® decreased 7%, and international gross sales increased 1%, including favorable changes in currency exchange rates of 8 percentage points. Worldwide gross sales of Other Girls products increased 24%, including favorable changes in currency exchange rates of 6 percentage points, due primarily to sales of High School Musical™ products and higher sales of Disney Princess® products. Worldwide gross sales of Wheels products increased 16%, including favorable changes in currency exchange rates of 6 percentage points, due primarily to Speed Racer™ sales and higher sales of Tyco® R/C, Hot Wheels®, and Matchbox® products. Worldwide gross sales of Entertainment products increased 4%, including favorable changes in currency exchange rates of 5 percentage points, primarily driven by sales of products tied to this Summer's key movie properties: Batman®: The Dark Knight™, Speed Racer™, and Kung Fu Panda™, partially offset by sales decline in CARS ™.

Worldwide gross sales of Fisher-Price Brands were $1.60 billion in the first nine months of 2008, flat with the first nine months of 2007, including a 3 percentage point benefit from currency exchange rates. Worldwide gross sales of Core Fisher-Price ® increased 6%, including favorable changes in currency exchange rates of 3 percentage points. Worldwide gross sales of Fisher-Price® Friends decreased by 18%, including favorable changes in currency exchange rates of 1 percentage point, primarily driven by sales declines in Dora the Explorer® and Sesame Street ® products as compared to strong levels in the prior year.

American Girl Brands gross sales were $209.0 million, up 10% in the first nine months of 2008, as compared to $189.7 million in the first nine months of 2007, primarily as a result of strong sales of products tied to the Kit Kittredge® movie, and contributions from the American Girl Boutique and Bistros™ in Atlanta, Georgia and Dallas, Texas, which opened during the second half of 2007.

Cost of Sales

Cost of sales in the first nine months of 2008 were $2.19 billion, up $130.9 million, or 6%, from $2.05 billion in 2007, as compared to a 5% increase in net sales. On an overall basis, cost of sales increased primarily due to higher input costs, partially offset by lower product recall costs during the first nine months of 2008. Within cost of sales, product costs increased by $91.7 million, or 6%, from $1.66 billion in the first nine months of 2007 to $1.75 billion in the first nine months of 2008. Royalty expense increased $8.1 million, or 5%, from $157.4 million in the first nine months of 2007 to $165.5 million in first nine months of 2008. Freight and logistics expenses increased by $31.1 million, or 13%, from $235.1 million in the first nine months of 2007 to $266.2 million in the first nine months of 2008.

Gross Profit

Gross profit, as a percentage of net sales, was 45.1% in the first nine months of 2008 as compared to 45.7% in the first nine months of 2007. The decrease in gross profit was primarily driven by higher input costs, partially offset by lower recall costs as compared to the first nine months of 2007, the benefit of price increases, and foreign currency exchange benefits.

Advertising and Promotion Expenses

Advertising and promotion expenses remained flat at 11.2% of net sales for the first nine months of 2008 and 2007.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $1.0 billion, or 26.1% of net sales, in the first nine months of 2008 as compared to $934.7 million, or 24.7% of net sales, in the first nine months of 2007. The increase in other selling and administrative expenses is primarily due to incremental MGA and product recall-related litigation fees of approximately $44 million, the impact of foreign currency exchange rates, higher bad debt expense, and higher compensation expense related to stock options and RSUs. Compensation expense related to stock options and RSUs totaled $25.1 million in the first nine months of 2008 as compared to $13.9 million in the first nine months of 2007.

Non-Operating Income (Expense)

Interest expense increased from $45.0 million in the first nine months of 2007 to $53.0 million in the first nine months of 2008, due to higher average borrowings, partially offset by lower average interest rates. Interest income decreased from $28.6 million in the first nine months of 2007 to $21.8 million in the first nine months of 2008, due to lower average interest rates, partially offset by higher average invested cash balances. Other non-operating expense was $16.0 million in the first nine months of 2008, primarily due to foreign currency exchange losses caused by local currency revaluation of US dollar cash balances held by a Latin American subsidiary and an investment impairment charge . . .